B.2 Key Provisions of the ASU

 

Connecting the Dots

As shown in Case A in ASC 740-10-55-231 (reproduced in Appendix A), if the taxes imposed by a particular foreign jurisdiction create reconciling items with respect to the jurisdiction that, in the aggregate, exceed the 5 percent threshold, that jurisdiction should be disclosed separately as a reconciling item within the category. Any individual reconciling item within that jurisdiction that also exceeds the 5 percent threshold should be separately disclosed by nature (i.e., by jurisdiction and by nature). In addition, ASC 740-10-50-12A specifies that “[w]ithin any foreign jurisdiction (regardless of whether it meets the 5 percent threshold), the reconciling item shall be separately disclosed by nature if [it] meets the 5 percent threshold.” This may happen when a particular foreign jurisdiction has a reconciling item or items that individually trigger the 5 percent threshold but are offset by other reconciling items that have an opposite impact on the rate reconciliation (i.e., the net impact of a foreign jurisdiction is below the 5 percent threshold in the aggregate).

 

Connecting the Dots

We expect that the incremental U.S. tax impact of the rules under Subpart F of the IRC and the U.S. tax on branch income (or loss) would also be included in this category.

Further, PBEs are permitted, but not required, to reflect the effect of incremental taxes presented in this category net of their related FTCs (e.g., an entity would be permitted to present the effects of GILTI taxes net of associated FTCs). Alternatively, PBEs may report the impacts of the incremental taxes separately from the related tax credits, which would be presented in the tax credits category. See Example B-1 and Example B-2 for illustrations of the presentation of the effects of cross-border tax laws.

Entities may disclose reconciling items presented within the changes in UTBs category on an aggregated basis for all jurisdictions (i.e., further disaggregation within this category is not required).

 

Connecting the Dots

If an entity intends to claim $100 of federal R&D tax credits on its “as-filed” tax return but, after considering the recognition and measurement guidance in ASC 740, determines that it can only recognize $75 of benefit for such tax credits, the entity may report in the rate reconciliation a net $75 benefit in the tax credits category. It would report any subsequent changes in the recognition or measurement of such credits in the changes in UTBs category. Alternatively, an entity may present the $100 of federal R&D tax credits in the tax credits category and the related $25 UTB in the changes in UTBs category.

ASU 2023-09 adjusts ASC 740-10-50-12 to align with the requirements in SEC Regulation S-X, Rule 4-08(h)(2). In paragraph BC38 of the ASU, the FASB notes that if “an entity (a) is domiciled in a jurisdiction with an income tax rate significantly lower than the U.S. statutory income tax rate or (b) operates at or around break even, the entity would be expected to apply judgment in determining the appropriateness of using a different statutory income tax rate and evaluating the materiality of reconciling items.”

Foreign (non-U.S.) domiciled entities that impose subnational income taxes should use the federal (national) rate as the starting point for the rate reconciliation and should not use a blended rate that includes both the federal (national) rate and the subnational rates. Accordingly, such foreign domiciled entities must separately disclose the impact of subnational income taxes in the jurisdiction of domicile within the state and local tax effects category.

Entities that have foreign operations in jurisdictions with subnational income taxes will also need to consider the appropriate presentation for such tax effects within the category for foreign tax effects. When disclosing reconciling items in the foreign tax effects category within the rate reconciliation, an entity should present all subnational tax effects included in the foreign tax effects category (including changes in valuation allowances, effects of changes in tax laws or rates, etc.) as a separate line item (subject to the 5 percent quantitative threshold) within the applicable foreign jurisdiction. All other reconciling items within that foreign jurisdiction would include the federal (national) tax effects only.

Entities may have varying return-to-provision adjustments related to reconciling items within different categories of the rate reconciliation. We believe that the determination of the appropriate category for presentation of return-to-provision adjustments depends on the specific facts and circumstances associated with the adjustment. Accordingly, entities should apply judgment to determine which presentation would be the most useful for financial statement users. Factors to consider in determining how to categorize an entity’s return-to-provision adjustments within the rate reconciliation may include, among others, an assessment of whether the adjustment:

• Is material.
• Is related to a category that must be further disaggregated on the basis of the 5 percent threshold.
• Affects the historical trend line of the category to which the underlying adjustment is related.

Withholding taxes that are within the scope of ASC 740 and imposed by a foreign jurisdiction should be presented in the foreign tax effects category in the jurisdiction imposing the tax.

If withholding taxes are imposed by the jurisdiction of domicile, we believe that it is generally appropriate to present them in an “other adjustments” category. However, if an entity has an existing policy to disclose the foreign and domestic components of pretax income or loss related to intra-entity transactions by using a pre-elimination presentation (see Section 14.6.2), the entity may find it more meaningful to present the withholding taxes in the effect of cross-border tax laws category. For example, assume that a U.S.-domiciled parent earns $100 of income before intercompany payments. In the same year, the U.S. parent pays a royalty of $100 to a foreign subsidiary and remits withholding taxes to the U.S. government when the payment is made. The foreign subsidiary has no other items of income or expense. If the entity has a policy to disclose the foreign and domestic components of pretax income or loss related to intra-entity transactions by using a pre-elimination presentation, the entity’s pretax income disclosure would reflect foreign pretax income of $100 (i.e., the foreign subsidiary received $100) and no domestic pretax income (i.e., the U.S. parent had income of $100 offset by the payment of $100). In such circumstances, because the income is reflected in the entity’s disclosure as foreign and the related withholding taxes are imposed by the United States, presenting the withholding taxes within the effect of cross-border tax laws category may be more meaningful.