Tax surprises like Disney’s have SEC seeking sunlight
WASHINGTON: US officials are concerned that the trillions of dollars companies park overseas are doing more than just helping them skirt taxes. They’re worried the practice leaves investors in the dark.
When Walt Disney investors were trying to anticipate the company’s performance in late 2012, the company told them to expect taxes to take a bigger bite out of earnings than the previous year.
Then, the company reclassified some foreign income as exempt from US taxes, transforming an expected cost into a windfall. The move added US$ 64 million to Disney’s bottom line, representing almost five per cent of net income for the quarter.
Disney made the change without explaining why. Securities and Exchange Commission officials pressed Disney for more information. Officials have done the same with several other companies since and now say there is growing concern that large multi-national companies offer too little information about foreign taxes.
International tax payments have drawn greater scrutiny in recent years as US companies have come to rely more heavily on foreign sales and complex strategies that allow them to reduce taxable income at home. More than 300 US companies now hold about US$ 2.1 trillion ( RM7.5 trillion) in profits overseas, according to data compiled by Bloomberg News.
The SEC, which doesn’t police tax payments, is now expanding a review aimed at pushing companies to say more about big overseas tax fluctuations that it says make it difficult for investors to predict earnings. Agency officials began the effort at a December conference by warning corporate accountants to be more forthcoming.
“There is very little transparency in tax,” said Tim Nollen, an analyst at Macquarie Capital USA who covers Disney. “It happens to be one of the most opaque areas of accounting.”
The focus on foreign taxes opens a new front in the SEC’s campaign to get public companies to explain the impact of their growing reliance on overseas earnings. The SEC previously pressured companies such as Apple and Google to disclose how much cash they kept overseas.
The SEC’s inquiry doesn’t focus on how much a multinational actually pays in US taxes, and indeed, Disney’s effective tax rate is usually close to the 35 per cent federal rate. Rather, the push is aimed at how companies explain their tax numbers to investors.
Last year, more than three dozen firms, including Anheuser-Busch InBev, General Electric and Diebold, received letters from the SEC seeking more information about how they reported foreign taxes.
Neither Disney nor any of the dozens of other companies that received queries about these issues from the SEC have been accused of wrongdoing.
“We are committed to providing clear and useful financial information to our investors and have provided disclosure designed to help them better understand the tax rate impact of our foreign earnings and investments,” David Jefferson, a Disney spokesman, said in an email. He said the company has significant cash needs abroad but doesn’t have large cash balances “trapped” overseas.
Now that the SEC has raised questions about disclosures it views as too generic, regulators say they expect more fulsome details on tax payments in company reports.
The agency says many multinationals don’t adequately describe big shifts in tax payments, leaving investors illequipped to forecast earnings. Many of the companies operate in dozens of countries, yet typically report a single, consolidated overseas tax figure in their public filings. That makes it difficult to predict how political developments and changing business conditions in specific countries could affect profits. — WP-Bloomberg