American companies may have to pay more taxes to fund President Biden’s $2.3 trillion infrastructure plan. How much they owe and to whom will probably remain a mystery.
Listed US companies publish their total tax payments and tax rates. But they have resisted plans that would require them to break down the amounts they pay to federal, state or foreign governments. The companies argue that additional disclosures would be costly and potentially misleading.
This is an area that most companies prefer to keep under the radar, especially those that don’t pay their fair share of taxes, so the fewer details the better, he said.
David Zion,
He heads the Zion Research Group, an accounting and tax research firm serving investors.
The corporate tax is currently in the spotlight because President Biden’s infrastructure proposal would increase the corporate tax rate from 21% to 28%.
The plan also provides for a 15 percent minimum tax for companies with sales of more than $2 billion. The tax is levied on companies that report high profits but pay little tax. The Treasury Department estimates that about 180 U.S. companies will meet the revenue threshold, and the 45 not named will have to pay the tax.
Here’s what we know about corporate taxes and why we don’t know more.
What do companies say about taxes?
US GAAP requires listed companies to report taxes paid in a given period in cash. Many companies prefer to report an annual figure rather than a quarterly figure because the rules do not specify a period. This figure is usually shown at the end of the company’s cash flow statement or in the footnotes.
Companies must also disclose pre-tax income for both U.S. and foreign operations and tax expenditures or income on the income statement. Companies are not allowed to split up their foreign activities per country. They also add their current and non-current deferred tax assets and liabilities recorded in the balance sheet.
Under U.S. GAAP, companies must report their effective tax rate by making a reconciliation between their internal tax rate and actual tax expense. Their effective tax rate, which they typically list as a footnote, is essentially the ratio of their tax expenditures to the pre-tax income or earnings they report to investors. Companies do not have to indicate the activities and jurisdictions to which the total tax burden relates.
April Little,
Partner in the accounting firm Grant Thornton LLP.
U.S. corporate tax disclosure requirements are similar to those in other countries, as U.S. GAAP rules in this area are closely aligned with International Financial Reporting Standards (IFRS), which are used in approximately 165 countries around the world.
Nevertheless, the international activities of companies often overshadow the picture. Once you start adding additional foreign jurisdictions, you may find that you have a preferential or favorable tax structure in one jurisdiction that significantly reduces the amount of tax you might pay there, Little said.
In 2016, the U.S. Treasury Department began requiring multinational companies with global annual sales of more than $850 million to disclose certain tax and other financial information on a country-by-country basis. Tax authorities in more than 90 countries have similar requirements, first proposed by the Organization for Economic Cooperation and Development. Companies are only required to disclose this information to the IRS or its local equivalent, not in publicly available documents.
What do the standard facilities and controls do?
The Financial Accounting Standards Board, which sets accounting standards for businesses and nonprofit organizations in the U.S., has been debating for years whether to require companies to disclose more information about their tax accounts. The first proposal came in 2016 and proposed, among other things, that companies distinguish between U.S. and foreign income taxes.
In 2019, the FASB updated its proposal to require more information. It asked public companies to calculate the amount of federal, state and foreign taxes they pay. The proposal also suggested that companies publish these figures on a quarterly basis.
More than four years after the original proposal, the FASB is still considering this issue. The Council last discussed the issue in February 2020, just prior to addressing the pandemic Covid 19 issue. The FASB plans to revisit the proposal at one of the panel’s upcoming meetings, but a spokeswoman said no date had yet been set.
The Securities and Exchange Commission enforces the FASB’s accounting rules for public companies. The Securities and Exchange Commission (SEC) can overrule the FASB, but rarely does so, because they generally agree on a process for establishing accounting rules. He did not respond to a request for comment.
Why don’t companies want to provide more information about their taxes?
Companies are resisting attempts by the FASB to force them to share their federal, state and foreign income taxes. Companies are often reluctant to make extensive disclosures because they could be viewed critically by investors and regulators, so financial managers rarely discuss their position on tax disclosure publicly.
Pharmaceutical companies
Eli Lilly.
& Co. stated that the breakdown can be misleading because the timing of income tax payments varies. Domestic payments can also be offset by foreign taxes that have accrued but not yet been paid, which can create a discrepancy when comparing U.S. and foreign taxes,
Donald Zakrowski,
the company’s vice president of finance and chief accountant, wrote in a letter to the FASB in 2019. An Eli Lilly spokesperson said the company had no comment beyond the letter.
Citigroup Inc.
stated that the taxing jurisdiction’s determination of tax-related costs would require changes to its financial processes and procedures, which would likely result in higher costs,
Robert Traficanti,
head of accounting policy at the World Bank, says in a letter to the FASB in 2019. Citigroup did not respond to a request for comment.
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Manufacturer of medicines
Pfizer Inc.
said investors and other users of financial statements would not be able to use U.S. and foreign income tax information to compare global companies. Two organizations with different countries of residence will not provide consistent data sets to compare, wrote then-Controller Loretta Cangialosi in a 2019 letter to the FASB. Pfizer stated that the letter still reflected its position.
The additional disclosures are useful not only to investors, but also to those applying the tax laws. You don’t want financial disclosure to become a breadcrumb trail for the IRS, he said.
Jack Ciesielski,
Accounting professional and owner of R.G. Associates Inc. an investment research firm and portfolio manager.
How does tax reporting complicate disclosure?
Tax information is also opaque because companies calculate certain key financial ratios differently for their financial statements and their tax accounts.
Many businesses use accrual accounting for their taxes. They must reconcile the difference between accrual accounting for tax returns to the IRS and the accrual basis of accounting in their financial statements. Accrual accounting is conceptually similar to tax accounting and accounting under generally accepted accounting principles (GAAP) in that companies typically record revenue when they receive it. However, the requirements differ on items such as depreciation of assets and other expenses.
In their financial statements, companies often depreciate assets on a straight-line basis, which means that the asset is depreciated evenly over its useful life. However, in order to meet the requirements of the IRS, companies must follow a specific depreciation schedule, calculation and method known as the modified accelerated cost recovery system. Many GAAP depreciation methods leave little residual value in the assets at the end of the useful life, while the IRS system, as noted above, leaves no value.
Michael Schub,
Professor of Accounting at Texas A&M University. This means that companies can recognise the full cost of the asset for tax purposes, but not for financial reporting purposes.
Let’s get one thing straight: Some investors want the FASB to require companies to provide a reconciliation between their GAAP calculated pre-tax earnings and their taxable income in their tax returns. It explains a lot about the difference between the two accounting frameworks and provides insight into the strategies used, Cieselski said.
Please email Mark Maurer at [email protected].
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