A panel of unelected accountants in suburban Connecticut would play an outsized role in shaping tax policy for the nation’s largest companies under a provision in Senate Democrats’ comprehensive tax, climate and health bill.
The bill uses a version of corporate income as measured under US financial accounting rules to determine what taxes companies owe. It aims to ensure that large companies making large book profits are taxed at a minimum rate of 15%. It puts pressure on companies to report in their financial statements, rules for which are prepared by the Financial Accounting Standards Board.
Any move the seven-person rulemaker takes to change the numbers companies are reporting could impact the likes of Amazon.com Inc., Apple Inc., and AT&T Inc. Businesses may be looking to reduce revenue to avoid paying high taxes, and she will review those moves. Congress could also be particularly interested in the work of the private sector board of directors.
The process of setting accounting rules is intended to be independent, focusing only on defining the numbers companies are reporting, so investors, creditors and analysts can gain insight into their financial health. When politics and business interests step in, it threatens the system, said Michelle Hanlon, an accounting professor at MIT’s Sloan School of Management, whose research focuses on the intersection of tax and accounting.
“I am concerned about the integrity of the financial accounting system and the quality of the information going to the capital markets,” Hanlon said. “The whole reason we now have separate financial accounting from government is for a good reason. Now we may ruin that.”
The bill provides a minimum tax of 15% for companies that report $1 billion or more in “financial year-end adjusted income,” a term not defined by U.S. generally accepted accounting principles, over a three-year period. The earnings figure would be based on what companies report as net income, adjusted for various factors – including whether they have already paid foreign taxes or received loans for research and development or green energy.
That 15% tax rate could bring in $313 billion, according to an estimate by the Joint Committee on Taxation, cited by Senate Democrats.
The FASB declined to comment on how the recent legislation, brokered by Senate Majority Leader Charles Schumer (DN.Y.) and Sen. Joe Manchin (DW.Va.), would affect its work . As lawmakers debated President Joe Biden’s Build Back Better plan, which included a similar accounting tax provision, FASB Chairman Richard Jones sounded the alarm. Using revenue, as defined by financial accounting rules, as a basis for collecting tax revenue “would undoubtedly put additional pressure on our mission and our work,” Jones said at a meeting with the board’s oversight committee in November.
Potential law enforcement interference is a worrying aspect of the plan, said Kyle Pomerleau, a senior fellow at the American Enterprise Institute.
“FASB members are likely to make more trips to DC if this is passed,” Pomerleau said.
FASB members and the trustees of the organization that oversees it must work especially hard to protect themselves from political and business pressures, said Robert Herz, who served as FASB chairman from 2002 to 2010. Herz, who headed the board during the height of the financial crisis, was dragged before Congress to defend accounting rules as the market collapsed.
“It’s going to be important for the FASB Board, Trustees and Foundation, and most importantly investors to say, ‘No, the tax rules are the tax rules and the accounting rules are the accounting rules,'” Herz said.
Founded in 1973, FASB is authorized by the US Securities and Exchange Commission to prepare financial reporting standards for US corporations and nonprofit organizations. Its founders deliberately based it in Norwalk, Connecticut so that it could be at least geographically separated from Wall Street money and Washington politics.
That hasn’t stopped corporations or legislators from lobbying the board. In 2020, Congress — in a massive coronavirus relief bill — allowed banks to delay adoption of a major bank accounting change enacted by the FASB, though a majority of banks declined.
Businesses and trade groups also often bring their interests to bear in shaping accounting rules, said Jack Ciesielski, founder of RG Associates, Inc. The tax plan could now change what they require.
“Now they will do more to cut income,” Ciesielski said. “It doesn’t bring in new players. It just changes the mindset of the existing players.”
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