Several Democratic senators recently wrote to the Connecticut-based nonprofit, tasked with crafting the accounting rules for corporate public filings to the U.S. Securities and Exchange Commission. The senators urged the FASB to adopt new transparency requirements based on anti-tax avoidance rules from the Organization for Economic Cooperation and Development.
For those lawmakers, and advocacy groups supporting the effort, it's not about using the FASB for a political agenda. Rather, they claim, it supports investors who believe elaborate tax avoidance schemes are distorting current reporting and preventing them from seeing an accurate view of the companies they invest in.
"The tax authorities have this information," said Gary Kalman, executive director of the Financial Accountability and Corporate Transparency Coalition. "The only people who don't have this information are the people putting their money at risk, and I think that's starting to irritate some investors."
The OECD's rule requires companies to submit a blueprint of their global operations, broken down by jurisdiction and including factors such as income, taxes paid and workforce. Those reports are then submitted to tax authorities, which can use them to identify the best areas for enforcement. For instance, it could scrutinize transfers to a jurisdiction where a taxpayer has high income but a small workforce and low tax payments.
Nongovernmental organizations have long advocated for companies to compile this information and make it public. But despite pressure from many advocacy groups, the OECD ultimately recommended only that governments require this information in tax filings, and exchange it among themselves through existing tax treaty networks.
Despite those recommendations, the European Union has considered forms of public country-by-country reporting, and U.S. lawmakers such as Sen. Chris Van Hollen, D-Md., have proposed legislation to enact public disclosure for U.S. companies. In 2010, Congress enacted rules requiring oil, gas and mining companies to disclose taxes and other government payments by country as part of an anti-corruption initiative, but those rules have never gone into effect.
The FASB itself considered greater disclosure requirements, including per-country income tax data, in a recent overhaul project. But it ultimately dropped that aspect, citing concerns about administration and relevance.
"To require all of this disclosure seems like a lot of effort without really knowing that it would be helpful," said Michelle Hanlon, a professor of accounting at the Massachusetts Institute of Technology.
April Little, Grant Thornton LLP's partner-in-charge of tax accounting and audit quality, said country-by-country data could be more misleading than helpful to investors. Governments can use the data as a starting point for investigations or audits, but investors could be left with false impressions from data without context. For instance, if a company pays low taxes in a particular jurisdiction, that may be due to incentives offered by that country or rebates from a particular investment, not tax avoidance. Sometimes the amount of taxes a company pays and the income tax liabilities it accrued in one year can be dramatically different due to several factors, not all of them problematic.
"I think there's a big difference between encouraging preparers to tell a more robust narrative to explain what they're doing, versus mandating it as a bare minimum requirement and laying out metrics that may not be the metrics that make sense," Little said. "It's not one size fits all, and it would be concerning if we tried to make it one size fits all."
Advocates claim that without clear metrics, companies can always avoid painting a true picture of their tax structures. And that, they argue, leaves investors without a clear idea of the risks they may be taking on as governments around the globe get more aggressive about tax enforcement.
"Companies can no longer push the envelope and assume that countries are not going to care," Kalman of the FACT Coalition said, citing the recent high-profile European Commission state aid investigations into the tax structures of large multinational corporations.
Companies today must identify potential liabilities from risky tax positions, but Kalman said those rules leave too much up to the company's judgment.
"If interpretations of laws change, the liabilities could be somewhat substantial," he said.
FASB officials said they would consider the senators' letter but did not yet have a timetable for revising its current tax disclosure rules.
The quiet nonprofit is increasingly becoming the focal point of discussions about inequities in the tax system. Sen. Elizabeth Warren, D-Mass., recently proposed a corporate surtax based on the worldwide financial profits of U.S. corporations — in effect, empowering the FASB to determine taxable income for a new second tax system.
That, in turn, has led to questions about whether the FASB, which chooses its own board members after getting input from various stakeholders, can be expected to remain independent and free from political influence.
Jeffrey Hoopes, a professor of accounting at the University of North Carolina, said that despite the lawmakers' claims to be looking out for investors, they clearly mean to use country-by-country reporting as a political wedge.
"These signers want the FASB to publicize information they think will look damning to the public so they can use it for political fodder, and they are willing to sacrifice the integrity of the financial accounting standards and disclosure rules in order to be able to achieve that political objective," he said.
--Editing by Robert Rudinger and Neil Cohen.
Correction: A previous version of this story used an outdated job title for April Little. The error has been corrected.
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