Tax Transparency; The IRS on the Defensive; and Debt Limit Drama
Tax-Related Transparency: Here to Stay?
Last week in the Cloakroom I highlighted the trend toward mandating financial information transparency for American companies. I touched on policies such as the new anti-money laundering law, The Corporate Transparency Act, which places onerous and potentially costly new reporting requirements on companies. In that vein, I’d like to continue the focus on other transparency initiatives that some U.S. businesses should know about.
EU Tax Reporting Requirements: An Additional Burden for Multinationals
One policy that is likely causing angst in Corporate tax departments and C-suites in the U.S. and around the world is the European Union’s Public Country-by country reporting mandate. In two months, European Union countries will begin to require companies operating within their borders to publicly disclose what they pay in taxes. I anticipate that the requirement will likely make many multinational corporations uncomfortable.
Despite the discomfort, companies that do business around the world should get used to disclosing tax information as regulations mandating tax transparency become commonplace amid growing perceptions that many large companies do not pay their fair share of taxes. Once June 23 arrives, who knows what we will learn about corporate tax activities.
FASB Enters the Fray
Another tax-related transparency initiative comes from the accounting policy standard setters at the Financial Accounting Standards Board (FASB). In March, The FASB issued its much-anticipated proposal to enhance the accounting standard governing income tax disclosure. In a press release announcing the proposal, FASB chair Richard Jones said the proposed changes to the standard are mainly related to rate reconciliation and income taxes paid information and are intended to help investors better assess how an entity's worldwide operations, related tax risks, tax planning, and operational opportunities affect its tax rate and prospects for future cash flows.
FASB is accepting comments from stakeholders and interested parties on the proposal until May 30, 2023. For more information on the proposal, click here.
IRS Remains a Focus on The Hill
Increasing federal tax collections was a cornerstone of the Biden Administration’s Inflation Reduction Act (IRA). Enacted last summer, the law included $80 billion for the IRS to implement enhanced tax enforcement and technological and operational improvements.
Republicans Target $80 Billion IRS Allocation
Since the law was signed by the president, Congressional Republicans have targeted it, calling it a mechanism for the IRS to abuse its power to crack down on taxpayers. In one of their first actions when the current session of Congress convened in January, House Republicans unanimously passed a measure to rescind the $80 billion allocated by the IRA. It is unlikely this bill will receive Senate approval and make it to the President’s desk, at which point a veto is certain.
Meanwhile, a provision to rescind the funding was included in House Speaker Kevin McCarthy’s draft 320-page debt ceiling bill. The debt limit bill has met strong opposition from House conservatives causing McCarthy to rewrite the bill at the last minute to win over GOP holdouts and secure enough votes for passage.
While you may ask why Republicans are going after the IRS funding in the debt ceiling bill after having already voted to eliminate the money in January. It has been included as a potential bargaining chip as it is expected any final debt ceiling bill will be the result of intense negotiations between the White House and Speaker McCarthy.
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Werfel Defends IRS Funding Request
In the Senate, IRS Commissioner Danny Werfel appeared before the Senate Finance Committee to discuss the Agency’s FY2024 funding request of $12.3 billion—a $180 billion increase over the previous year’s budget, Werfel told the committee that the $12.3 billion is needed to fund a tax system in an economy that “grows in size and complexity every year.”
Committee Republicans expressed concerns that the IRS will target small businesses in its enhanced enforcement efforts while Werfel reiterated the agency’s pledge to not increase audits of taxpayers with annual incomes of $400,000.
House Passes Debt Limit Bill
The House approved legislation to raise the debt limit by $1.35 trillion by March 31, 2024 while cutting federal discretionary spending to FY2022 levels and imposing a 1% cap on growth of spending. It includes reversals of many elements of the President’s agenda. The bill passed on a tight party line vote of 217-215 after intense negotiations between hold out Republicans and Speaker Kevin McCarthy (R-CA). While passage of the measure is seen as a symbolic victory for McCarthy, it represents an opportunity to bring House Democrats and the White House to the negotiating table to further address the debt limit. In an illustration of Democratic opposition to the legislation, Senate Majority Leader Chuck Schumer (D-NY) said the bill was "dead on arrival" in the Senate. And the White House threatened a veto if it reaches the President’s desk.
Meanwhile, there is some debate on how the flow of tax payments will determine when the U.S. reaches the debt limit. Some experts have warned that tax receipts have come in slower than expected, raising fears that we will hit the debt ceiling sooner than some are estimating. However, Goldman Sachs says that a sudden acceleration in tax payments has shifted their estimate of when default could occur from June to July.
These conflicting appraisals of the situation only will muddle the situation and may eliminate any urgency the President and Congressional Democrats will have to begin negotiations with Republicans. One thing is certain: This issue will not resolve itself without both sides working out a deal to prevent a crippling default.
GMT Hot Topic In Switzerland
Adoption of the 15% Global Minimum Tax is a hot topic in Switzerland as the Swiss Finance Minister urges citizens to vote in favor of the corporate tax rate in a national referendum scheduled for June 18th. To generate support for the vote, The Swiss may want to point to Ireland’s experience with increasing corporate rates.
Accounting Policy News
Notable Fact of the Week
Is there any upside to settling a lawsuit for more than $787 million? If there is, perhaps it is that the settlement can be written off as a business expense.