Inside The Republican’s Battle To Roll Back New Tax Disclosure Rules

Financial statements

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Starting in 2025, corporations will undergo a seismic shift in the tax information they disclose to the public. Under Accounting Standards Update 2023-09, corporations must now provide enhanced tax information in their annual financial statements that includes a more specific rate reconciliation, more disaggregated disclosure of where companies pay their taxes, and additional qualitative information explaining their tax function. While this increased tax disclosure is music to the ears of many investors and external stakeholders who have long been demanding more tax transparency, it has recently met a roadblock from House Republicans. This article discusses the new requirements of ASU 2023-09 and analyzes the unusual battle between the Financial Accounting Standards Board and the legislative branch.

Accounting Standard Update 2023-09

On December 14, 2023, the FASB issued ASU 2023-09, marking the largest change to tax disclosures in public company financial statements since FIN 48 in 2007. The primary goal of this new standard is to “enhance the transparency and decision usefulness of the income tax disclosures.” These new requirements go into effect for companies with a fiscal-year end after December 15, 2025, meaning a large swath of public companies will need to comply with the new disclosure requirements starting this year.

The key changes involve more disclosure of their tax activities. They can be broken out into two key components.

First, public companies must now disclose annually the specific categories of their rate reconciliation and provide additional information for reconciling items that meet quantitative thresholds. The rate reconciliation is an existing disclosure that takes the statutory tax rate (currently 21%) and creates a roadmap from that statutory rate to the effective tax rate to which the company actually pays for taxes. For instance, in 2023, Apple reported an effective tax rate of 14.7%. This means that even though the corporate tax rate is 21%, Apple paid several percent lower, resulting in billions of dollars in savings. Specifically, Apple’s expected tax based on the corporate tax rate was $23,885 million. The rate reconciliation shows the key categories that led to Apple only paying $16,741 million in federal income taxes.

The new standard now requires specific categories to be disclosed, including state and local tax, foreign tax effects, effects of changes in tax laws, effect of cross-border tax laws, tax credits, changes in the valuation allowances, nontaxable or nondeductible items, changes in unrecognized tax benefits, and any other significant reconciling items. More importantly, the new disclosure rules require more uniformity in the disclosures by requiring the reconciling items to be presented on a gross (rather than net) basis, and it requires certain qualitative discussions when reconciling items eclipse specified quantitative thresholds. These changes will drastically enhance financial statement user’s ability to understand how companies are lowering their tax expense.

Second, public companies must now disclose annually additional information about income taxes paid. In particular, it now requires public companies to disclose the amount of income taxes paid disaggregated by individual jurisdictions when those jurisdictions comprise more than 5% of total income taxes paid. Thus, companies with significant overseas operations will now need to be more transparent about the nature and extent of their overseas operations. This change will shed additional light on where companies are operating and how those operations impact their taxes paid.

The House Republicans Versus The FASB

The Republicans in the House of Representatives are now threatening funding for the FASB due to this change in the standard. According to Bloomberg, a spending proposal release by the House Appropriations Committee includes a provision that prevents the SEC from approving their annual budget unless ASU 2023-09 is withdrawn. This article also reports that large business groups and the House Republicans asked the FASB to drop these requirements.

These actions by the legislative branch are not the first time that they have attempted to exert influence on the FASB and financial accounting rules. For instance, according to Congressional records, in May of 1994, Congress pushed back on the FASB at they attempted to prevent the entity from implementing mandatory expensing of stock options. Similar situations arose relating to the FASB’s proposed rules surrounding fair value accounting during the 2008 financial crisis and, in recent years, changes to the accounting treatment for leases.

The reasons for dropping these new tax disclosure requirements appear to be self-serving for large multinational corporations who might wish to keep this information confidential. While disclosing more information can often be viewed as a benefit to corporations and their shareholders since it enhances their information, past tax disclosures, like FIN 48, were met with similar resistance. As discussed in The Tax Adviser, corporations that had to begin disclosing unrecognized tax benefits in their financials felt as though the disclosures would provide a roadmap for the IRS to strengthen their scrutiny over tax positions. Put differently, companies feared that the benefits of enhanced tax transparency would be outweighed by the lower realizability of their tax benefits, particularly those that are labeled more uncertain.

The concerns about what tax information will now be disclosed is understand by the over 60 comment letters the FASB received about the new requirements and the standard’s implementation. In particular, Big 4 accounting firms, such as PricewaterhouseCoopers, cast significant doubt over whether ASU 2023-09 will meet its intended objectives. In their comment, PwC makes statements like, “We believe that changes in unrecognized tax benefits should be disclosed in the rate reconciliation in the aggregate, not on a jurisdictional basis” and “We do not agree with the application of a 5% threshold to disaggregate income taxes paid (net of refunds received) by individual jurisdictions.” While these are not statements suggesting the new reporting standard should not be enacted at all, they underscore the severity of the disclosures and how there could be unintended consequences to enacting it.

Despite some of the concerns, many consultants highlight the need for more transparent tax disclosures to meet social responsibility demands. For instance, KPMG highlights that tax has emerged as an important element of ESG and that it is important to stakeholders that these demands are met. Furthermore, country-by-country reporting, which is a key part of the OECD BEPS project, has been implemented across the globe for most countries besides the U.S. While ASU 2023-09 differs from the prescribed OECD proposed actions, it does provide some uniform disclosure between U.S. firms and their international counterparts.

Even though ASU 2023-09 appears to be a step in this direction, Congress has different ideas, setting up an unusual showdown between the legislative branch and the FASB.