Financial Accounting Standards Board Considers Shining a Light on Corporate Tax Practices
On March 17, Richard Phillips of the Institute on Taxation and Economic Policy (ITEP) and I traveled to Norwalk, Connecticut to participate in a roundtable discussion at the Financial Accounting Standards Board (FASB). This is a little-known, but highly influential body that sets the accounting standards for U.S. companies. The morning discussion focused on a proposal to increase disclosures on corporate financial statements, including new disclosures on revenues and taxes on a country-by-country level. This information is critically important if we are to tackle the problem of offshoring profits in tax havens.
We heard several participants assert that, before any new disclosures are required, board members must ensure they know why it is being required and for what the users of the information will use it. Fair questions.
Unfortunately, I am not sure the discussion on tax disclosures adequately answered them. The focus was more theoretical and principle-based with a heavy reliance on accountant-speak. I greatly appreciated the opportunity to participate, but I confess that I did not fully take the opportunity to offer an alternative perspective. Since hindsight is 20/20, here is what I should have said.
The case for disclosure of revenues, taxes, and certain operations by multinational companies is clear and strong. In a previous era — before the advent of the modern multinational — maybe the case was not as persuasive, but today it is hard to argue in opposition.
Ask ITEP — the researchers there are the first to say that the reports they produce on corporate tax dodging are all estimates. The exact realities of what companies pay are often shrouded by complicated or limited publicly available data. With insufficient data, how do policymakers make intelligent policy decisions? How do investors make choices regarding risk?
Until a 2013 hearing held by then-Senator Carl Levin’s investigations committee, no one knew the degree to which Apple had been offshoring profits. It was a revelation at the time that, through clever accounting tricks, Apple claimed $30 billion in ‘stateless’ income — that’s accounting-speak for ‘they paid no taxes on those profits to any nation anywhere in the world.’ The Securities and Exchange Commission followed up the Senate hearing with a letter to Apple asking for information on undisclosed potential tax liability. Apple responded, in not so many words, “Don’t worry. There’s nothing to see. We’re fine. Thanks for asking.” Fast forward to 2016 and the European Union is going after Apple for roughly $14 billion dollars over secret tax deals. Turns out, there was plenty to see, but no requirement to disclose it.
In 2010, GE reported $5.1 billion in U.S. profits. That same year, they received $3.2 billion in tax benefits to offset their tax bill. Were there to be a crackdown on aggressive tax avoidance schemes and the company, its shareholders would be facing a very different picture of the company’s health.
A few years back, Dell’s investors were facing a buyout and negotiating the price based on the value of the company. Two well respected valuation experts came up with estimates that differed by $28 billion (126 percent) due, in large part, to the differences in the future tax liability of its profits booked offshore.
Companies may like the lack of accountability that comes with secrecy, but it is not a prescription that leads to healthy markets.
After one participant said FASB should not consider public policy decision-making in its own policymaking, my colleague, Richard, was quick to note that such considerations are precisely what FASB should consider. Certainly, investors need information (a primary focus of the participants), but companies operate within a broader economy. Informed policy decisions are the only way to have intelligent policy debates that produce better, even if imperfect, outcomes.
The growing awareness of extensive tax avoidance and the resulting distortions on financial statements has thankfully prompted some policymakers to consider new rules. FASB should move ahead with its proposal with a few important changes.
The most important change is to require companies to report information on all the countries in which they operate. Larger multinationals already report this information to the IRS, it would not be hard to include the information in the financial statements. At the very least, the rules should focus on reporting in countries where there are significant revenues booked rather than taxes paid. The potential liability is lower in countries where they pay substantial taxes on their revenues and higher in countries where they don’t.
Unsurprisingly, the companies that produce the statements urged caution and secrecy. The users of the information — investors, tax research organizations, and others (such as FACT and our partner organizations) — advocated for greater disclosure.
As the Board continues its deliberations, they would be wise to remind themselves of the guiding questions they laid out at the outset of the discussion: to make sure they know why any information is being required and what the users of the information will use it for?
On the issue of reporting revenues and taxes on a country by country level, the answers are clear. Investors need to make adequate assessments of risk. Policy makers need to make informed decisions. Healthy markets and a robust, sustainable economy depend upon both.
Gary Kalman is the executive director of the FACT Coalition.