Offshore Taxes: SEC Asks for More Disclosures

U.S. multinational companies have been putting a significant amount of their offshore profits in foreign tax havens, but investors say they know little about these tax strategies and the risks associated with them. So, the Investor Advisory Committee, a subcommittee of the Securities and Exchange Commission (SEC), recently asked the Financial Accounting Standards Board (FASB) to revise its 2016 proposal on income tax disclosures to include a requirement for public companies to provide more detailed information about foreign taxes on a country-by-country basis.

FASB proposes expanded tax disclosures

In the past several years, there has been a significant increase in offshore profits by U.S. multinationals that have used so-called tax “inversions.” By parking money in foreign locations with lower tax rates, inversions enable companies to avoid paying the 35% domestic corporate tax rate. So, investors have been asking regulators to increase transparency about offshore tax reporting.

In July 2016, the FASB issued Proposed Accounting Standards Update (ASU) No. 2016-270, Income Taxes (Topic 740): Disclosure Framework — Changes to the Disclosure Requirements for Income Taxes. The proposal would require U.S. companies to disclose their foreign and domestic taxes, describe changes to tax laws that may affect their tax payments and explain the circumstances that cause a change to the assertion about reinvested foreign earnings.

SEC subcommittee wants more foreign tax details

Earlier this summer, John Coates, the chair of the SEC’s Investor Advisory Committee, sent a comment letter to the FASB. Coates’ letter said, “We believe that more information about foreign regulatory and tax-related risks could be useful to investors.” Specifically, the committee wants public companies to be required to disclose, on a country-by-country basis, relevant information regarding:

• Their tax strategies and the risks accompanying those strategies,
• The sustainability of the companies’ effective tax rates, and
• The degree to which current tax planning may obscure long-term tax risk.

Companies already provide country-by-country information to the IRS, so the compliance costs wouldn’t be significant.

Coates told the FASB, “In connection with your proposed update, we note that basic quantitative information about taxes paid to foreign countries by issuers, and the relevant accounting information to put that information into context, would also be a basic predicate for understanding the risk disclosures that we have recommended the SEC to consider.” He added that abstract risk disclosures won’t be meaningful without having concrete financial figures, such as revenue, profit and tax flows associated with those risks.

The Investor Advisory Committee also advised the FASB against limiting the proposed disclosures to countries where significant tax is being paid. A company might pay little tax — despite earning significant profits — but not be able to sustain such low tax rates over the long run. Coates urged the FASB disclosures to focus on tax-related financial risks, rather than actual tax payments.

House Democrats add pressure

In the meantime, tax reform groups have been lobbying Congress to crack down on corporate use of offshore tax havens. Several House Democrats recently asked the FASB to require country-by-country reporting of foreign taxes. A requirement mandating these types of disclosures could become a negotiating tool during congressional tax reform negotiations this fall.

© 2017