By Mark Maurer
U.S. companies might have to pay more in taxes to fund President
Biden's $2.3 trillion infrastructure plan. How much they owe and to
whom will likely remain a mystery.
Public companies in America disclose their total tax payments
and their tax rate. But they have resisted plans that would require
them to break down how much they pay to the federal government,
states or foreign countries. Businesses say the additional
disclosure would be costly and potentially misleading.
"This is an area that most companies would prefer to keep
lurking in the shadows, especially those that are not paying their
fair share of taxes, so the less details the better," said David
Zion, head of Zion Research Group, an accounting and tax research
firm that serves investors.
Corporate taxes are in the spotlight right now because President
Biden's infrastructure proposal calls for boosting the corporate
tax rate to 28% from the current 21%.
The plan also sets a 15% minimum tax on companies with income of
more than $2 billion. The tax would target firms that report large
profits but low tax payments. About 180 U.S. companies meet the
income threshold and an undisclosed 45 would have to pay the tax,
according to Treasury estimates.
Here is what we do know about companies' taxes and why we don't
know more.
What Do Companies Disclose About Taxes?
Public companies under U.S. Generally Accepted Accounting
Principles have to disclose cash taxes they pay during a particular
period. Many businesses choose to give an annual figure instead of
a quarterly one because the rules don't specify the period. The
figure is usually disclosed at the bottom of the companies'
statement of cash flows or in the footnotes.
Companies also have to provide their pretax net income for U.S.
and foreign operations as well as their tax expense or benefit in
the income statement. Businesses don't have to break out their
foreign operations by country. They also tally up their current and
noncurrent deferred tax assets or liabilities on the balance
sheet.
Companies under U.S. GAAP must give an effective tax rate,
reconciling their domestic statutory rate with their actual tax
expense. The effective tax rate, which they usually provide in the
footnotes, is essentially the ratio between their tax expense and
their pretax income, or the profit they disclosed to investors.
Companies don't need to spell out which business activities and
jurisdictions the total tax expense is attributable to, said April
Little, a partner at professional-services firm Grant Thornton
LLP.
America's disclosure requirements on corporate taxes are similar
to those in other countries because U.S. GAAP rules on this matter
are closely aligned with International Financial Reporting
Standards, or IFRS, which are used in about 165 jurisdictions
around the world.
Still, companies' international operations often muddy the
picture. "Once you start adding in incremental foreign
jurisdictions, you may have a preferential or favorable tax
structure in a particular jurisdiction that substantially reduces
the amount of tax that you might pay there," Ms. Little said.
The Treasury Department in 2016 began forcing U.S. multinational
companies with annual global revenues above $850 million to provide
certain tax and other financial information on a country-by-country
basis. Tax authorities in more than 90 countries have a similar
requirement, which was first proposed by the Organization for
Economic Cooperation and Development. Companies only have to
disclose this information to the Internal Revenue Service or its
local equivalent, but not in publicly accessible filings.
What Are Standard-Setters and Regulators Doing?
The Financial Accounting Standards Board, which sets accounting
standards for U.S. companies and nonprofits, has for years been
discussing plans to require companies to disclose more about their
tax bills. The first proposal came in 2016 and suggested that
companies should distinguish between their U.S. and foreign income
taxes, among other changes.
The FASB in 2019 updated its proposal, requiring more
disclosure. It asked public companies to break out the amount of
federal, state and foreign taxes they paid. The proposal also
suggested that companies should disclose those figures on a
quarterly basis.
More than four years after the first proposal, the FASB is still
looking at the issue. The board last discussed the matter in
February 2020, shortly before shifting its focus to Covid-19
pandemic-related issues. The FASB plans to address the proposal
again at a coming board meeting, but the date hasn't been set,
according to a spokeswoman.
The Securities and Exchange Commission enforces the accounting
rules that the FASB sets for public companies. The SEC could
overrule the FASB, but rarely does, as they usually work together
to align on accounting rule making. It didn't respond to a request
for comment.
Why Don't Companies Want to Disclose More About Their Taxes?
Companies have been pushing back against the FASB's efforts to
make them share a breakdown of their federal, state and foreign
income taxes. Businesses are often wary of extensive disclosures as
they can cause scrutiny from investors and regulators, which is why
finance executives rarely discuss their stance on tax disclosure
publicly.
Pharmaceutical company Eli Lilly & Co. said the breakdown
could be misleading because deadlines for paying income taxes vary.
Domestic payments also could be offset by foreign taxes that are
accrued, but not yet paid, which could result in a mismatch when
comparing U.S. with foreign taxes, Donald Zakrowski, the company's
vice president of finance and chief accounting officer, wrote in a
letter to the FASB in 2019. A spokeswoman for Eli Lilly said the
company didn't have a comment beyond its letter.
Citigroup Inc. said specifying income-tax expense by tax
jurisdictions would require changes to its financial processes and
procedures, which would likely increase costs, Robert Traficanti,
the bank's global head of accounting policy, said in a 2019 letter
to the FASB. Citigroup didn't respond to a request for comment.
Drugmaker Pfizer Inc. said investors and other users of
financial statements wouldn't be able to use the information
specifying U.S. and foreign income taxes to compare global
companies. "Two entities with different countries of domicile would
not provide consistent data sets for comparison," then-Controller
Loretta Cangialosi wrote in a 2019 letter to FASB. Pfizer said the
letter still reflects its position.
Additional disclosures wouldn't only inform investors but also
those who enforce tax laws. "They do not want the
financial-statement disclosures to make a bread-crumb trail for the
IRS to follow," said Jack Ciesielski, an accounting expert and
owner of R.G. Associates Inc., an investment research firm and
portfolio manager.
How Does Tax Accounting Complicate Disclosure?
Tax disclosure is also opaque because companies calculate some
important financial figures differently for their financial
statements and tax accounting.
Many companies use the accrual method of accounting for their
taxes. They have to reconcile the differences between tax accruals
for an IRS filing and the accrual basis of accounting in their
financial statements. Accrual accounting is conceptually the same
under tax law and GAAP, in that companies generally record income
when they earn it. But the requirements differ on issues such as
asset depreciation and other expenses.
Companies often depreciate assets using the straight-line method
in their financial statements, meaning that an asset wears out
evenly over its life. But to comply with the IRS, companies have to
follow a specific timetable, calculation and depreciation method
known as a modified accelerated cost recovery system. Many GAAP
depreciation methods result in a small residual value for assets at
the end of their life, whereas the IRS system leaves no value, said
Michael Shaub, accounting professor at Texas A&M University.
This means that companies can recover the entire cost of an asset
for tax purposes, but not for financial reporting.
To provide clarity, some investors want the FASB to require
companies to reconcile their pretax income under GAAP to the
taxable income on their tax return. "That would explain plenty
about the differences in the two bases of accounting and provide a
view into the strategies used," Mr. Ciesielski said.
Write to Mark Maurer at mark.maurer@wsj.com
(END) Dow Jones Newswires
April 20, 2021 05:44 ET (09:44 GMT)
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