Financial basis

Reconciliation agreement draws head of accounting rules into tax policy

A panel of unelected accountants from suburban Connecticut would play an outsized role in shaping the tax policy of the nation’s largest corporations under a provision of the sweeping Tax, Climate and Healthcare Bill. health of Senate Democrats.

The bill uses a version of corporate income, as measured under US financial accounting rules, to determine what businesses owe in taxes. It is designed to ensure that large companies making large “book” profits are taxed at a minimum rate of 15%. This puts pressure on what companies report in their financial statements, rules for which are developed by the Financial Accounting Standards Board.

Any decision by the seven-member policymaker to change the companies’ reported numbers could affect Amazon.com Inc., Apple Inc., and AT&T Inc. Companies might be keen to manage their earnings to avoid large tax payments, and they will examine these movements. Congress could also take more interest in the work of the private sector council.

The accounting rule-making process is supposed to be independent, focusing only on defining the figures reported by companies, so that investors, creditors and analysts have insight into their financial health. When politics and business interests interfere, 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 information coming into the capital markets,” Hanlon said. “The reason we now have separate government financial accounting is for good reason. Now, maybe we’ll mess this up.

The bill would impose a 15% minimum tax on corporations that report $1 billion or more over three years in “adjusted financial statement income,” a term not defined by state generally accepted accounting principles. -United. The income figure would be based on what companies report as net income, adjusted for various factors, including whether they have ever paid foreign taxes or received research and development or green energy credits.

That 15% rate could bring in $313 billion, according to a Joint Committee on Taxation estimate cited by Senate Democrats.

The FASB declined to comment on how the latest bill, negotiated by Senate Majority Leader Charles Schumer (DN.Y.) and Sen. Joe Manchin (DW.Va.), would affect its work. When lawmakers were debating President Joe Biden’s Build Back Better plan, which contained a similar book tax provision, FASB Chairman Richard Jones sounded the alarm. Using income as defined by financial accounting rules as the basis for collecting tax revenue “would be an additional strain, no doubt, on our mission and what we do,” Jones said in November during a meeting with the supervisory body of the board of directors.

Potential interference by lawmakers is a concerning aspect of the plan, said Kyle Pomerleau, senior fellow at the American Enterprise Institute.

“FASB members will likely make more trips to DC if this passes,” Pomerleau said.

Members of the FASB and the directors of the organization that oversees it will have to work very hard to protect themselves from political and business pressures, said Robert Herz, who served as FASB chairman from 2002 to 2010. Herz, who led the board of directors during the height of the financial crisis, was dragged before Congress to defend accounting rules as the market crashed.

“It will be important for the FASB board, the trustees, the foundation and, very importantly, the investors, to say, ‘No, the tax rules are the tax rules and the accounting rules are the accounting rules. ‘” Herz said. .

Created in 1973, the FASB is authorized by the United States Securities and Exchange Commission to write accounting rules for American corporations and nonprofit organizations. Its founders deliberately established it in Norwalk, Connecticut, so that it could at least be geographically separated from Wall Street money and Washington politics.

That hasn’t stopped companies or lawmakers from lobbying the board. In 2020, Congress – in massive coronavirus relief legislation – allowed banks to delay passing a major change in bank accounting enacted by the FASB, although the majority of banks refused.

Corporations and business groups also often inject their interests into how accounting rules are shaped, said Jack Ciesielski, founder of RG Associates, Inc. The tax plan could now change what they’re asking for.

“Now they’re going to be more excited about cutting their income,” Ciesielski said. “It does not inject new players. It just changes the mindset of existing players.