The income tax disclosures update that the Financial Accounting Standards Board (FASB) unanimously approved on August 30 would require public and private companies to disaggregate annual reporting on income taxes paid domestically and in foreign countries. Currently, U.S. companies’ financial statements provide only a total for the cash taxes they paid, not broken down by federal and state levels or international jurisdictions.
But starting in 2025, publicly listed companies will share many more details on their tax situations (private companies have until 2026).
Private and public companies must include the amount of income tax paid annually, net of refunds received, to state, federal, and foreign taxing authorities. A company that pays at least 5% of its total tax payments to an individual country or jurisdiction must disclose the country or state and the amount of tax paid.
“I think it is fair to say that this is a significant chapter in greater tax transparency.”
Partner and ESG Tax Leader, KPMG
Public companies will have to go further, sharing details that reconcile their domestic statutory and effective tax rates. Those details include foreign tax effects, enactment of new tax laws, the effect of cross-border tax laws, tax credits, valuation allowances, and nontaxable or nondeductible items.
“And that's something that ESG has been pushing for — more transparency around taxes, how companies determine the taxes they pay, and where they pay those taxes.”
The FACT Coalition, a group of state, national, and international organizations fighting offshore tax abuses, has said that “investors need information on the tax practices of companies within their portfolios — particularly on multinational companies — to assess various tax enforcement, reform, and other risks.”
But a July letter to FASB Chair Richard Jones from Congressional Republicans said the update, first proposed in 2016, represented “a politicized effort to name-and-shame companies and influence tax policy.” They also said, “The proposed disclosures of information likely will expose U.S. multinational entities to enhanced review and tax audits by foreign governments.”
Gains and Losses
The update passed last week, revised from the version proposed in March 2023, eased some of the requirements for companies.
Reporting will be annual, not quarterly as prescribed initially. FASB also made retrospective adoption (changes to prior period information) optional and pushed out the effective date. In addition, it eased disclosures on unrecognized tax benefits at the country level, which could have exposed companies to increased audits by foreign governments, said KPMG’s Weaver.
But complying won’t be a piece of cake. For one, although 2025 sounds far away, it’s a tight timeline, said Weaver. He doesn’t expect many companies to adopt the reporting early, as usually happens with new accounting standards. Companies in general don’t have the processes in place currently to disclose this information accurately, “and they certainly don’t have the controls over those processes today,” Weaver said.
One big hurdle for companies will be generating a “profit before income tax” number at a country level compatible with generally accepted accounting principles. “Most companies keep management books, and they roll that up to a U.S. GAAP consolidation,” Weaver said.
The other thing to note about the FASB accounting standards update, a revision to Topic 740, is that it’s not happening in isolation. On a near parallel deadline, the European Union has introduced the EU Public CbCR directive (country-by-country reporting). Public and private multinationals of a certain size will have to disclose revenue; profits; taxes, accrued and paid; number of employees; and value of assets.
“If you layer [the FASB rules] with other required disclosures such as the EU CbCR, you will understand a company’s tax strategy very clearly,” Weaver said.
For example, investors, analysts, and regulators can see whether a company has negotiated tax incentives with a particular country. They will also be in a much better position “to do their own forecasting of the company’s effective tax rate going forward,” he said.