FASB Approves Expanded Tax Disclosure Requirements for Companies Despite Opposition

Companies will have to disclose more details about the income taxes they pay to government authorities under new requirements approved by the Financial Accounting Standards Board, a move to provide investors with greater transparency. 

The approval comes after years of revised proposals for similar changes and continued pushback from companies. Businesses have argued that the changes would lead to more confusion among investors and that current disclosure is sufficient for understanding their tax profile whereas additional information would put the firms at a competitive disadvantage.

“The costs won’t be nearly as significant,” FASB Vice Chairman Jim Kroeker said, referring to comparisons with earlier proposals. “I’m not trying to minimize those. There’s going to be discipline and controls now at a lower level, but I think with significant benefits.” 

Under existing rules, public companies must report the total amount of cash taxes they pay at least once a year. The businesses provide their total pretax net income for U.S. and foreign operations, as well as their tax expense or benefit. They aren’t required to break out their tax and profit data by country. Companies must also disclose their effective tax rate, which is the ratio between their tax expense and pretax income.

The U.S. accounting standards-setter for companies on Wednesday voted 7-0 to adopt an update that would require both public and private companies to break out the income taxes paid to authorities at the federal, state and foreign levels for the full year in their annual financial reports.

If a particular jurisdiction represented more than 5% of these taxes for the year, businesses will have to identify that jurisdiction and specify the amount in their annual reports.

Public companies will need to share more detail on how they reconcile their domestic statutory rate with the rate they actually paid. The actual rate is usually lower because it includes the effects of tax credits and other breaks.

These companies will also have to present a standardized table showing how categories such as state and local income taxes, foreign taxes, tax credits and the enactment of new tax laws contribute to the difference between the two rates, the statutory rate and the actual one, by providing the percentages and dollar amounts.

For public companies, the requirements are set to go into effect for 2025 annual reports. They would go into effect for private companies one year after that date. Companies can adopt the changes early. The FASB expects to formally issue the requirements by year-end, a spokeswoman said.

The board also made tweaks to the version of the proposal that was issued in March for public comment, such as allowing unrecognized tax benefits to be disclosed as one total amount as opposed to on a country-by-country basis, in response to feedback it received.

The FASB first proposed additional tax disclosure in 2016, seeking a distinction between companies’ U.S. and foreign income taxes, among other changes. Three years later, the standard-setter updated the proposal, adding more requirements such as a breakout of the amount of federal, state and foreign taxes public companies paid, as well as disclosure on a quarterly basis. That didn’t advance to a final standard either, in part because the FASB gave priority to pandemic-related issues. 

All board members on Wednesday said the benefits of the requirements justify the costs that will be incurred by businesses. Ten percent of U.S. executives said they are prepared to disclose their total tax contributions, according to a KPMG survey released in June.

Companies, during the public comment period for the latest proposal, took issue with the suggested requirements again. Mastercard

“The additional information which would be required to be disclosed by U.S. registrants may be commercially sensitive,” the credit-card giant wrote in a May 29 letter to the FASB. 

Health-insurance company UnitedHealth Group, in a May 30 letter to the FASB, said the additional disclosure could create confusion for investors, lenders and creditors by disproportionately presenting income tax information that it considers immaterial or unimportant. 

Mastercard declined to comment and UnitedHealth didn’t respond to a request for comment Wednesday. 

Investors generally supported the proposal, but said they wanted it to require even more detail. MFS Investment Management said the disclosures will help it evaluate the governance of companies it owns on clients’ behalf, along with providing a better understanding of earnings risks and opportunities. 

“We believe more aggressive management of tax issues could, at times, provide evidence that a company’s management team and board may have a risk tolerance that is greater than we would prefer given our long-term (often 6-8 year) average holding period,” Robert Wilson, an investment officer at MFS Investment Management, wrote to the FASB on May 8. MFS declined to comment further. 

Meanwhile, the CFA Institute, which represents investment professionals, said in a July 20 letter that the proposed requirements won’t prove useful to investors, as the FASB has steadily reduced the scope of the project over the years, for example by removing disclosures on deferred income tax liabilities related to cumulative undistributed earnings in foreign subsidiaries.

Write to Mark Maurer at [email protected]