No More Secrets: U.S. Public Companies Must Now Disclose Tax Payments in Annual Reports

Photo byKeith Jones

US accounting standard-setters have reached a decision after seven years and three contentious proposals, mandating that companies provide more comprehensive information about their tax payments to the public. This move aims to enhance transparency and offer investors better insights into companies' tax exposures.

Starting as early as 2025, public companies will be required to include a detailed breakdown of income tax payments made throughout the year in their annual financial reports. This disclosure will encompass payments made to state, federal, and foreign taxing authorities, net of refunds received. The Financial Accounting Standards Board (FASB) made this decision unanimously.

Under the updated accounting rule, companies have to reveal both the amount of tax they paid and the particular country or state it was paid to. This requirement comes into effect if a company's tax payments to one place make up 5% or more of their total tax payments. The FASB believes that these changes will provide investors with a clearer perspective on the potential risks and opportunities tied to income tax.

Fredrick Cannon, a member of the FASB, emphasized the significance of this project in addressing investors' concerns about the opaqueness of the tax domain. He stated, "A lot of the tax area is a blind spot for investors. I believe this project can address those issues by allowing investors to get a better view of the risks and opportunities in income tax."

The decision to impose these new disclosure requirements stems from persistent complaints voiced by investors and analysts over the years. They have contended that the lump-sum financial statement disclosures related to income tax provided by companies lack sufficient detail to assess the true extent of their tax liabilities. This issue is particularly pronounced for businesses operating internationally, where changes in tax rates could significantly impact their financial standing.

Currently, American businesses must disclose the amount of cash taxes they pay in their financial reports. However, there is no mandate for them to provide a detailed breakdown by nation or state. The forthcoming changes aim to address this gap in transparency.

The FASB initially proposed quarterly disclosures for state, federal, and foreign income taxes. However, during the recent vote, the frequency of these disclosures was revised to an annual requirement.

For public companies based in Illinois, this accounting standard change is poised to have significant implications. If you're conducting business in Illinois, be aware that new disclosure rules apply to you because it's part of the larger economy in the United States. Now, businesses must give a full account of their income tax payments. This includes taxes paid not only to Illinois but also to federal agencies and overseas entities.

If a company pays at least 5% of its total taxes to Illinois, they will now need to reveal this information. This adjustment means companies may have to improve their tax reporting systems for correct and prompt sharing.

Illinois-based companies with international operations will find these changes particularly pertinent. The additional requirement to divulge tax payments to foreign jurisdictions will demand a heightened level of transparency regarding their global tax exposure.

In conclusion, the decision by US accounting standard-setters to enforce increased tax disclosure requirements will undoubtedly impact public companies nationwide, including those situated in Illinois. By providing investors with more detailed information about tax payments, these changes aim to foster greater transparency, support informed investment decisions, and offer a clearer understanding of the potential risks and opportunities tied to income tax for both local and international operations.

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US Companies Divulging Tax Details in Accounting Change