Originally published by DC Journal on May 1, 2023.
The politicization of governmental, industry and social institutions is a growing concern. Widespread distrust in institutions is straining social order and undermining the stability of American society. Unfortunately, the Financial Accounting Standards Board (FASB) has decided to risk its credibility by proposing tax-disclosure requirements that serve the interests of politicians rather than the investors it exists to inform.
The FASB is a private sector, non-profit organization that develops financial accounting and reporting standards used by organizations that adhere to the Generally Accepted Accounting Principles (GAAP). It is recognized by the U.S. Securities and Exchange Commission as the accounting standard setter for public companies, giving its standards the force of law. Its mission is “to establish and improve financial accounting and reporting standards to provide useful information to investors.”
The proposed changes to international tax disclosures undermine that mission.
The new rules would require businesses to provide jurisdiction-by-jurisdiction reporting of effective income tax rates. However, this information would come with no context to render it beneficial to investors. After all, similar effective tax rates between two or more jurisdictions can reflect very different tax strategies and cash-flow risks, and those political and economic environments need to have nothing in common. To the typical investor, the proposed disclosures are thus more noise than signal.
It’s important to remember that the purpose of these disclosures is only to provide investors with decision-useful information. Imposing significant compliance costs to accommodate disclosure requirements that fail to benefit investors is not within the scope of the FASB’s or SEC’s authority.
If not to benefit investors, for what purpose are the updated disclosure rules being considered? It seems noteworthy that some congressional Democrats, including Bernie Sanders and Elizabeth Warren, have authored multiple letters to FASB urging that GAAP rules be updated to their benefit. Specifically, they argue that the additional tax disclosures “will inform future policy debates and lead to better outcomes.”
This is an open admission that FASB is being pressured to serve political interests. But what “better outcomes” do they even have in mind? Higher taxes, of course. They favorably cite the efforts of the G-20, which has pushed the Organisation for Economic Co-operation and Development to form a global tax cartel aimed at harmonizing tax rates by intimidating and punishing low-tax jurisdictions.
Far from benefiting investors as some congressional Democrats claim, the new disclosure requirements would disadvantage U.S. firms and harm shareholders compared to their international competitors. It would provide foreign tax collectors, including those in jurisdictions with competing state-owned enterprises, an irresistible opportunity to craft rules aimed specifically at extracting profits from U.S.-owned firms.
The threat of abusive or inappropriate use of taxpayer data is why nations typically require tax information exchange agreements with specific protocols governing the use of taxpayer information before such data can be demanded by foreign tax authorities. Unilaterally imposing requirements on U.S. firms to broadcast this information not only obliterates these protections but does so in an uncompetitive, one-sided fashion.
It’s not unusual for the FASB to be responsive to government requests from the SEC, which has statutory authority to set requirements for financial statements but has chosen since the FASB’s establishment in 1973 to rely on the accounting industry to maintain those standards. However, the purpose of those requests was ostensibly to clarify or improve reporting standards for the benefit of investors, per FASB’s mission. The new tax disclosure rules would have the opposite effect.
The FASB should not succumb to political pressure to serve the interests of tax hikers. The proposed requirements for jurisdiction-by-jurisdiction reporting should be withdrawn.
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Image credit: 401(K) 2012 | CC BY-SA 2.0.
