Changes To US Foreign Earnings Accounting Method Could Hit Company Profits

by Mike Godfrey, Tax-News.com, Washington

29 July 2004

A change in the method of deferred tax asset accounting proposed by the Financial Accounting Standards Board may leave US multinationals facing an increase in their reported liabilities and deep cuts in their profits, reports indicate.

The board of the FASB voted narrowly on Tuesday to continue examining the possibility of requiring firms to book a liability on taxes they could come to owe on profits held overseas.

As a result of this method of deferred tax accounting, companies would be forced to hold greater amounts of reserves against potential tax liabilities, thus reducing earnings and profits, the Wall Street Journal reported.

Under current US tax law, earnings of foreign subsidiaries reinvested abroad are not subject to US tax unless repatriated as a dividend or realised as a capital gain when the parent firm sells the subsidiary.

As very few US multinationals will have set up deferred tax accounts unless they have concrete plans to repatriate earnings, the FASB’s rule change could represent a “major hit” for the earnings of many multinational US firms according to Robert Willens, a tax expert at Lehman Brothers.

Analysts at Bear Stearns & Co. have reported that companies in the Standard & Poor’s 500-stock index reported $518 billion in unrepatriated foreign profits as of the end of 2003.

While the FASB proposal is an attempt to bring US rules in line with internationally accepted principles, one member has admitted that it has little support in the corporate world.

Neither, it seems, does the separate proposal contained in pending corporate tax legislation for a 5.25% one year ‘tax holiday’ on repatriated foreign earnings.

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