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By Denise Lugo
June 24 — Companies would be required to disclose, in the notes to financial statements, the cash, cash equivalents, and marketable securities held in their foreign subsidiaries, under potential new income tax disclosures the Financial Accounting Standards Board will propose in July.
The new rule could affect U.S. multinationals, including industrial firms that sell goods overseas, but don't repatriate revenues earned. The disclosures would reveal the liquidity of those companies' foreign operations.
Some practitioners say the disclosures should go further.
Matthew Gardner, executive director of the Institute on Taxation and Economic Policy, told Bloomberg BNA June 24 that FASB's forthcoming proposal is an improvement on the status quo, but not “enough to tell us what we need to know about whether these companies are avoiding taxes by withholding their cash offshore.”
“What shareholders ought to know is exactly where these companies are holding cash on a country-by-country basis,” said Gardner.
“That would be the gold standard for disclosure on this,” he said.
Some companies presently don't provide the disclosures for unrepatriated revenue because it isn't mandated under U.S. generally accepted accounting principles (GAAP). A company, however, needs to assert that the moneys are “indefinitely reinvested.”
Companies that don't repatriate foreign revenues typically don't do so because the tax rate in the foreign jurisdiction they're operating in is lower than that in the U.S.
Under the current tax code, those that do repatriate pay the tax rate at the current federal rate—which is a higher rate—but they would get credit for the tax paid in the foreign subsidiary, the practitioner said. Tax disclosures of the repatriated amounts are required.
It has become a highly contentious topic. Some groups say unrepatriated earnings are a tax-avoidance strategy companies use that obscures information their shareholders should have about billions of dollars in earnings. For example, Citizens for Tax Justice said in their March report that American Fortune 500 corporations held $2.4 trillion of profits offshore by the end of 2015.
FASB has said the disclosures will provide financial statement users with better information about income taxes, thereby enabling them to make better assessments of firms' economic health. Users have said accounting rules for income tax are very complex.
The proposal is also part of FASB's broader disclosure framework project, which aims to improve the effectiveness of disclosures in the notes to financial statements.
The focus of the income tax disclosures is to both test the concepts for disclosures and improve existing disclosures in ASC 740, Income Taxes.
At its June 8 meeting, FASB said it would begin drafting the proposal, which will be issued for a 75-day comment period ending on or about Sept. 30.
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