We discuss the accounting rules that apply to reporting a U.S. company’s international operations. We use examples to illustrate diversity in accounting and offer caveats for policy makers, standard setters, analysts, and researchers regarding their interpretation and use of financial accounting information.This is an important topic because it highlights a few of the many reasons why we might benefit from Dodd-Frank-style disclosure in the face of media stories about the low, low taxes paid on a global basis by companies like Google, Apple, and Microsoft. The authors use case studies of SEC disclosures to highlight some of the book/tax differences that show why companies' reported tax rates are nowhere near their actual taxes paid. For example, in the case of Google:
- Google’s “expected” provision at its federal statutory tax rate of 35 percent is a“hypothetical” federal income tax that Google would owe if all of its pretax book income was reported on its U.S. corporate income tax return.
- In 2011, Google reported “income before income taxes” of $12.3 billion. At a 35 percent tax rate, Google would owe $4.3 billion in taxes
- But Google reported an income tax provision (an amount it says it owes) of $2.5 billion, for an effective rate of 21%.
- The difference between the headline 35% rate and the 21% effective rate is explained by book/tax reporting differences for various taxes and credits, some of which are permanent differences (will never be reconciled) and some of which could be reconciled in the future, but the big difference is explained by its "foreign rate differential," which is short form for what Google saved by reporting its income as earned outside of the US.
Much more in the paper. The basic story is not new, but it's nice to see how the policy choices that go into corporate tax disclosure play out in practice and how they inform our understanding of how the tax system works. The authors have a few suggestions for how non-accountants (including journalists) should understand and interpret what they find in SEC documents.
I have been told that one of the reasons corporate managers resist greater tax disclosure in their SEC filings, such as is contemplated under Dodd-Frank and its impetus, the EITI regime (and country by country reporting more broadly) is the fear that people will misunderstand the information and therefore draw incorrect conclusions. The authors acknowledge the validity of this fear and explore how companies make disclosure decisions with public perception in mind. Yet this paper itself provides an antidote to that fear. It shows that tax data disclosure is capable of being correctly understood and interpreted. We may need experts to help us do that in the face of flexible rules and ambiguous cases, but there is no shortage of experts.