By Glenn Cheney

Norwalk, Conn. -- It's far from decided, but the Financial Accounting Standards Board is looking into the practical and cost-benefit considerations of requiring U.S.-based multinational companies to record deferred tax liabilities on profits that are earned overseas. If it looks like producing the requisite information might be worth the effort, the board may work toward such a rule.

Under current U.S. tax law, the earnings of foreign subsidiaries are not subject to taxation in this country unless the profits are "repatriated." Those subsidiaries have to pay local taxes in the country of domicile, of course; but the parent company back in the United States need not record a tax charge and the corresponding liability on the difference between taxes paid offshore and taxes that would be paid on repatriated earnings.

The board has directed its staff to look into the cost-benefit and practical implications of eliminating that exception, requiring companies to record deferred taxes on all unremitted earnings. If it is reasonably cost-effective, the board may decide to expand the scope of the project to consider the change.

The issue is on the table as part of a short-term project to converge parts of several U.S. standards with international standards where existing underlying principles are similar. The change would bring FASB Statement 109, on accounting for income taxes, more in line with International Accounting Standard 12. The International Accounting Standards Board has a similar exception and has proposed changing IAS 12 to eliminate their exception.

The board was split on whether to ask staff to explore the issue and present more information. Four members thought that more information might be useful in deciding whether to include the issue within the scope of the project. Three saw no need to further consider changing the rule. No one on the board expressed eagerness to include the issue within the scope of the project.

Hard math
Calculating deferred taxes on all unremitted earnings could become extremely complicated for large multinational corporations that have subsidiaries in several countries. Holding companies may have complicated subsidiary relationships through a number of tax jurisdictions, each with different taxation regimes. Accounting calculations could become a nightmare.

If a rule is eventually developed along the lines of the IASB proposal, a company that has no current intent to repatriate earnings would not have a tax charge. The change would only affect companies that do expect to remit earnings in the "foreseeable future," and do not currently provide for taxes on unremitted earnings. Though the term "foreseeable future" is undefined in relevant accounting literature, audit firms have generally interpreted it to mean "more than five years."

If the board eventually opts to eliminate the foreign operations exception, the final pronouncement could cause many large companies to see a drop in their reported earnings. The larger multinationals could be required to provide deferred taxes on tens of billions of dollars. Corporations may object to not only the effect on their reported earnings but to the excessive burden of calculating the deferred tax.

FASB staff expects to report to the board by the end of the year.

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