Thursday 23 November 2017

Blind spots mean debate on corporate tax overhaul in US remains in the dark

Richard Rubin

Mark Everson saw plenty of corporate tax returns during his four-year tenure as commissioner of the Internal Revenue Service. He thinks the public should see them, too.

The corporate tax debate in Washington would benefit from more detailed information about how much companies are paying and how various parts of the tax code are operating, he says.

"As we look at reform, we need to look at transparency, certainly," says Everson, currently the commissioner of workforce development in Indiana and vice-chairman of Alliantgroup LP, which provides tax services to small and medium-sized companies.

"We want to have the very best information available to the policy makers as they make those choices."

The lack of transparency about companies' tax payments can lead to a confusing public discourse about whether businesses are paying too little or too much.

The opacity of corporate taxes gained attention earlier this year when Fairfield, Connecticut-based General Electric engaged in some back-and- forth with the 'New York Times' about GE's federal tax liability for 2010.

According to company filings, GE's consolidated worldwide tax rate from 2005 through 2009 was 11.6pc and its 2010 rate was 7.4pc; it is projecting a much higher rate for 2011. In the company's 2010 annual filing, it projected a $3.25bn (€2.21bn) accounting tax benefit in the US, though that doesn't reflect the actual tax liability for tax year 2010.

Lack of transparency

The reality is that it is impossible to use publicly available data to determine how much a US company paid the US government for a particular tax year.

US businesses file tax returns annually to the IRS. As a result of privacy laws enacted in 1976 following the Watergate scandal, the IRS can't release that information to the public.

Under accounting rules, publicly traded corporations report their effective tax rates, deferred tax liability, tax costs for accounting purposes and aggregated cash tax payments on annual financial statements.

A company's tax provision in a particular year is a combination of cash taxes paid in that year and changes to prior years' tax returns, such as those made when resolving audits.

Publicly traded companies don't have to disclose how much they pay to specific governments in particular fiscal years or for specific tax years.

In 2006, in the aftermath of the collapse of Enron, the Financial Accounting Standards Board began requiring companies to disclose the reserves for tax positions that authorities may dispute.

They are not required to explain those positions or disaggregate them in their financial statements.

New IRS Rules

The IRS, meanwhile, is implementing a requirement that companies give tax authorities more details about those uncertain tax positions.

Everson, who left the IRS in 2007, says he thinks resistance from businesses would likely prevent the public release of all or part of corporate tax returns.

Companies have fought efforts to impose more disclosure requirements because the information could cause competitive disadvantages and further confuse the public, says Timothy McCormally, executive director of Tax Executives Institute Inc, a Washington-based association of corporate tax professionals.

"Among the concerns that we would have about putting more in the financial statements is: Do you end up raising more questions than you answer?" he says.

Lillian Mills, a professor of accounting at the McCombs School of Business at the University of Texas, says it would be helpful to know how much in taxes companies are paying to the US and to other governments, as opposed to the aggregate tax benefit or tax provision reported on the financial statements.

One problem, she says, is who would impose such a requirement, because the role of the Norwalk, Connecticut-based accounting board -- which establishes standards for the industry -- isn't to provide information for tax policy.

Disclosing Information

Income for accounting purposes and income for tax purposes are calculated differently, particularly in how they consider depreciation, income from outside the US and stock options.

After Senator Charles Grassley, an Iowa Republican, and other lawmakers raised concerns almost a decade ago amid disclosures by Enron and other companies, the IRS began requiring companies to file a form reconciling book and tax income.

Disclosing information from corporate tax returns has some precedent. The US required companies to make public their returns in the mid-1920s. Other countries, including Norway and Finland, publicly disclose such information.

In the US, Wisconsin allows individuals to request how much income tax was paid by certain companies for certain years.

"We use this very specifically as an integral tool in helping inform the public about tax policy," says Jack Norman, research director at the Institute for Wisconsin's Future, a research and advocacy group in Glendale, Wisconsin, that has sought information about companies to lobby the state legislature.

The accounting disclosure requirements created in 2006 have had a "real impact" in preventing companies from engaging in "shady" tax shelters because of the need to disclose reserves, says Victor Fleischer, a tax law professor at the University of Colorado.

At the same time, he says, expanded disclosure requirements for publicly traded companies could only encourage businesses to remain privately held. "You set up a situation where it's easy for private companies to engage in aggressive tax planning," Fleischer adds. (Bloomberg)

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