What the New Tax Disclosure Rules Can — and Can’t — Tell You

Publicly traded companies are now subject to more detailed tax disclosure requirements. The Improvements to Income Tax Disclosures, issued as ASU 2023-09 by the Financial Accounting Standards Board, are designed to increase the transparency and decision-usefulness of tax information. Among other things, the new rules require companies to disclose greater detail about their tax exposure in significant countries — and to break down the factors driving differences between what companies report as tax expense and what they theoretically “should” pay.

While well-intentioned, the new requirements further complicate what can be inferred from the income tax disclosures. Although making the tax rate reconciliation more granular than before, the reconciliation remains anchored in a relic of a tax system the U.S. left behind.

The new requirements include updates to the tax rate reconciliation — a table that reconciles a company’s effective tax rate back to the U.S. statutory rate of 21%. The logic is straightforward: if a company earns $1 billion before taxes, a naive application of the U.S. statutory rate would produce $210 million in tax expense. The reconciliation explains why the reported tax expense number differs — tax credits, deductions, foreign operations, etc. — giving users a more detailed picture a company’s tax exposure.

Heralded as a blanket improvement for financial statement disclosure (and met with great resistance by others), the new rules now require companies to separately disclose where material differences are occurring. Some reports have latched on to the fact that many companies commonly report traditional tax havens (e.g., Switzerland, Ireland, Netherlands, and Singapore) as jurisdictions leading to substantial differences in the rate reconciliation table.

But understanding what the reconciliation can — and cannot — tell you is essential before drawing conclusions. As discussed in a related TPN article, financial statement users generally are not very successful at identifying aggressive tax planning, and this disclosure has the potential to make things more confusing.

A Benchmark Built for a Different Era

The tax rate reconciliation anchors every public company’s tax disclosure to the U.S. statutory rate of 21%. That anchor implicitly assumes that the entire pool of a multinational company’s pre-tax income is subject to U.S. tax at the statutory rate. Under a traditional worldwide tax system — the framework in place when the FASB first introduced the disclosure requirement in 1992 — that assumption was more fitting. Under its previous worldwide tax system, the U.S. claimed the right to tax all worldwide income of a U.S. incorporated firm.

The U.S. no longer operates under such a far-reaching system.

The 2017 Tax Cuts and Jobs Act moved the U.S. substantially toward a territorial tax system — one in which foreign earnings are largely exempt from U.S. tax. Under this framework, the prior assumption that a U.S.-incorporated firm will pay 21% on its worldwide income to the U.S. government is no longer valid. The U.S. has structurally ceded its claim to tax most foreign earnings at the statutory rate.

The reconciliation format, however, has not kept pace with that shift creating interpretive complications, particularly around rate differentials across countries.

The Gap Between Presentation and Reality

What results is a disclosure that creates the appearance of an idealistic but improbable – if not impossible – scenario: that U.S. multinational firms should be paying a flat 21% on their worldwide income to the U.S. Treasury, with any deviation representing tax dollars meant for the U.S. that companies simply aren’t paying. Every dollar of income taxed in Switzerland at 8.5%, or in Ireland at 12.5%, shows up in the reconciliation as a negative line item — a “foreign rate differential” measured against a U.S. baseline the company was never realistically going to pay in the first place.The assumption here is that the income originated in the U.S. and should have otherwise been taxed there – an assumption for many large multinational firms that cannot be confirmed nor generally supported given the vastness of their international operations and markets.

This matters because the reconciliation is widely read by investors, journalists, policymakers, and regulators as a map of tax risk and, implicitly, tax behavior. While often interpreted as aggressive tax avoidance —the differences may simply reflect the intended operation of current U.S. tax law, under which foreign income earned by foreign subsidiaries serving foreign customers is taxed in the countries where that activity occurs.

Eli Lilly’s 2025 SEC annual filings (a common target in tax avoidance finger-pointing) shown in Figure 1 helps illustrate the point. The number shown as “Statutory tax rate difference between Ireland and the U.S.” presents the amount of income tax that would have been paid to the U.S. over that paid to Ireland had the income been taxed under the U.S. tax system – a number that is unlikely, or at the least unknown to represent a real tax liability for Eli Lilly under current international tax laws.

Source: Eli Lilly and Company 2025 Form 10-K: https://www.sec.gov/ix?doc=/Archives/edgar/

Further, the amount itself is unreliable given data is not provided to determine where that income could have otherwise been taxed. If taxed in one of 60 different OECD-reported countries with a lower statutory corporate income tax rate than the U.S., this number would be overstated, and understated for one of the 82 countries with higher rates.

That is not a compliance failure, nor a moral shortcoming. It is a structural feature of how international taxation works — and of a global consensus, enshrined in treaties and domestic law across nearly every major economy, that income will be taxed where value is created, not exclusively where a parent company happens to be incorporated.