US GAAP – New Standards for Income Disclosure
In the US context, the Financial Accounting Standards Board (FASB) introduced an amendment to its accounting standards codification on income taxes in late 2023[1]. This amendment includes improvements to income tax disclosures.
As part of the Generally Accepted Accounting Principles (US GAAP), this amendment is expected to become effective for public business entities after December 2024 and other entities after December 2025.
The amendments address investor requests for increased transparency regarding income tax information by improving income tax disclosures, mainly related to rate reconciliation and information on income taxes paid. One of the key improvements is the requirement to show income taxes paid disaggregated by jurisdiction, such as showing income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign jurisdictions.
In the US context, these new accounting standards can be seen as a small step towards adopting ESG in tax. However, ESG in tax encompasses more than just transparency[2]. In line with the OECD’s Base Erosion Profit Shifting (BEPS) project, countries are already mandating taxpayers to provide tax information related to jurisdictions through Country-by-Country Reports, Master Files, and Local Files.
ESG in Tax: Moving Beyond Transparency
Some multinational companies, like Petrobras in Brazil[3], are taking a voluntary approach by not only disclosing taxes paid by jurisdiction and benefits received from governments but also by outlining the principles that govern their relationships with tax administrations around the world and their tax policies. An example of ESG going beyond transparency is when Petrobras discloses its tax policies and explains the reasons behind its investments, mentioning the business reasons for those investments in addition to tax efficiency. This exceeds the requirements of current accounting standards and tax regulations.
Benefits of adopting voluntary ESG in taxation
There is a clear link between corporate tax practices and social responsibility in today’s business environment. Businesses benefit from society and should contribute back in the form of taxes. These benefits encompass infrastructure, employee and consumer development, and the use of natural resources. If a corporation reaps all these benefits but fails to pay the proper corporate income tax, it could be perceived as an exploiter by society and, consequently, damage its business and reputation.
This tarnishes their reputation and can lead to public backlash, regulatory scrutiny, and a loss of consumer trust, all of which can ultimately harm the business. Therefore, responsible tax practices are not just a legal obligation but a critical aspect of a corporation’s broader commitment to social responsibility. All business entities should consider integrating ESG principles into their tax practices.
Tiago Luiz de Moura Albuquerque
OAB-SP 274.885
[1] See: https://fasb.org/page/ShowPdf?path=ASU%202023-09.pdf&title=ACCOUNTING%20STANDARDS%20UPDATE%202023-09%E2%80%94Income%20Taxes%20(Topic%20740):%20Improvements%20to%20Income%20Tax%20Disclosures
[2] See: OLIVEIRA, Fabio Luiz Gomes Gaspar de. Driving Better Behavior in International Taxation: The Case for the Adoption of ESG Tax Standards as an Equitable Way to Enhance Business Substance and Transparency. 2024. Trabalho entregue para conclusão do Mestrado em Direito Tributário Internacional e Comparado – Instituto Brasileiro de Direito Tributário, São Paulo, 2024.
[3] See: https://sustentabilidade.petrobras.com.br/documents/1449993/82badcb9-71d0-47be-67dc-cbc99aa48a56
