GAAP rule changes threaten to boost corporate taxes | Insights | Bloomberg Professional Services

This analysis is by Bloomberg Intelligence Government Analyst Andrew Silverman. It appeared first on the Bloomberg Terminal.

Multinationals brace for higher taxes under accounting proposals

Two US GAAP proposals that will probably be adopted this year could help authorities battle tax avoidance. Companies would have to parse cash levies by country, likely laying out the results of income-tax planning. They’d also have to divvy up expenses between segments, in some cases offering a look at transfer-pricing strategies.

Cross-border tax arbitrage in the crosshairs

Accounting rules to be proposed this spring may raise the global effective tax rates for US multinational companies. The Financial Accounting Standards Board plans to require that companies report cash levies by country that exceed 5% of total income taxes paid. Companies also may have to reconcile the impact of tax laws that give rise to cross-border arbitrage. The new US minimum tax and a similar levy to be adopted in most OECD countries are both derived from financial statements — the new data available under the FASB plans would amplify those taxes.

The board’s proposal has received pushback from businesses. Pfizer said the additional information would confuse investors. The FASB has said it’s serious about the plan and willing to scale it back, which we think indicates it will probably be adopted.

New expense reporting could trigger disputes

US multinational corporations may find that a FASB requirement to break out expenses by segment in financial statements spurs tax authorities to challenge deductions. When a company’s business divisions are distinguished not only by purpose but also by geography — an insurance company with a reinsurance division in Bermuda, for example — we believe that countries may be able to use the more detailed information to dispute deductions.

Corporations can deduct the cost of intracompany services. When they are provided across borders, the expenses can reduce a country’s tax base. The rule change could help countries flag more questionable deductions.