Companies, Investors Pan Planned Income Tax Disclosures

It’s hard to find anyone happy about a plan to force companies to reveal more accounting details about the income taxes they pay.

Multinational companies from the Walt Disney Co. to Microsoft Corp. say the information requested by the Financial Accounting Standards Board will be a pain to compile and misleading to the public.

Investors and analysts say the proposal doesn’t go far enough. A central piece of the plan—breaking down income taxes between domestic and foreign without going country by country—would keep details about company income taxes concealed in something akin to a black box.

“It’s throwing Bermuda in with Germany in with Ireland and throwing it in with Zambia,” said Nicholas Lusiani a senior adviser in the private sector division of Oxfam America. “It makes no sense.”

Oxfam is one of four dozen groups as diverse as the Illinois State Treasurers Office and The Sisters of St. Francis of Philadelphia that co-signed a letter to FASB, pleading for the rulemaker to force companies to be more transparent. Better tax information from companies leads to investors making better decisions, they argue.

But companies, trade groups, and professional associations are just as passionate in their retorts.

“I really feel it’s information in the hands of people who could do things that truly could potentially ruin a company’s reputation,” Frank Brod, chief accounting officer at Microsoft, said at a University of Southern California financial reporting conference June 6.

But “it wouldn’t necessarily be a factual representation,” he said.

Stage Set for Showdown

FASB’s plan has been controversial since day one.

The board in 2016 released a proposal calling on companies to offer more details about income taxes in their financial statement footnotes, but multinational businesses panned it.

As tax reform gained momentum in Washington, FASB put the project on the back burner, reasoning that tax laws could change significantly, requiring it to take a fresh look at disclosures anyway.

FASB released the second version of its disclosure plan in March, opening the board to a second showdown between businesses and investors.

Readers of financial statements for several reasons increasingly want more information about the taxes a company pays, said David Gonzales, a senior accounting analyst at Moody’s Investors Service.

Existing financial reporting rules don’t tell investors where companies operate and how much income flows through particular countries. Investors want these details because it can raise red flags if a company has a large portion of income allocated to a low-tax country. Those low rates may not last, opening up the company for significant tax liabilities, Gonzales said.

“Every country is moving more toward getting corporations, or at least trying to get corporations, to pay a little more fair taxes in their jurisdiction,” Gonzales said.

More information also can enlighten investors about a company’s aggressive tax planning strategies—and potential for penalties, Lusiani said. He cited the example of European regulators in 2016 fining Apple Inc. $14 billion for unpaid taxes in Ireland, which caught investors off guard. “That has serious financial implications,” he said.

Not So Simple, Businesses Say

Companies know that the taxes they pay—or don’t pay—is a politically fraught topic.

They also argue that the information investors are asking FASB to require isn’t simple to provide.

For one thing, the timing of taxes actually paid doesn’t necessarily correlate to when earnings are reported because tax payments in a financial report may include the effects of both current and prior periods, according to Financial Executives International, a group that represents large companies like Procter & Gamble Co. and Raytheon Co.

Tax payments often include the effect of prior year audit settlements, refunds, penalties, and credits across jurisdictions. At best, the breakdown of information could be confusing, and at worst, misleading, the group said.

In addition, the tax footnote is the last piece of information a company includes in its financial statement, so gathering new tax information may delay the whole process further, said Sarah Ovuka, a professional accounting fellow at FEI.

Privately held companies are unhappy with FASB’s proposal, too.

Many private companies “penalty proof” themselves by paying estimated taxes when they’re due but appeal for extensions to file their actual returns only when their audited financial statements are complete, said Julie Killian, a shareholder at Clayton & McKervey PC, a tax and audit firm in Southfield, Mich.

“It just comes down to a pure resources conversation and whether they can get the details of the taxes done early enough,” Killian said.

Unanimous Disagreement

As written, FASB plan calls for companies to break down details about income tax expenses or benefits, as well as cash taxes paid, in categories as broad as domestic, foreign, and state. The plan also would have companies disclose their sources of income or loss from operations before tax expenses or benefits, broken down by domestic and foreign.

“It doesn’t help me isolate any risk or isolate any tax planning strategies or isolate any social responsibility to pay taxes,” Moody’s Gonzales said. “These things are very difficult still to understand.”

And even this level of detail will be a cumbersome exercise for companies, FEI’s Ovuka said.

“The immense amount of work that could take begs the question: What is the true value the investor could get out of it?” Ovuka said.

—With assistance from Amanda Iacone.