US lawmakers have approved legislation that will require the standardised reporting of environmental, social and governance (ESG) measures as well as the disclosure of offshore activities by US corporations.
The US House of Representatives passed the ESG Disclosure and Simplification Act and the Disclosure of Tax Havens and Offshoring Act on Wednesday. The bills were part of the larger Corporate Governance Improvement and Investor Protection Act and still have to be passed by the Senate.
Under the ESG bill, the Securities and Exchange Commission (SEC) will create definitions of ESG metrics and mandate standardised ESG disclosures.
Two weeks ago, G7 finance ministers made a commitment to make climate-related financial disclosures mandatory for corporates.
The tax haven disclosure and offshoring act requires multinational corporations registered with the SEC to report their taxes paid and other key financial information publicly on a country-by-country basis.
Until now US corporations with a revenue of more than US$850 million were already reporting information like tangible assets, revenue, net profits and employees for their subsidiaries overseas on a country-by-country basis, but the information has been anonymised and only published on an aggregate basis.
The OECD has so far published country-by-country reporting data for several countries for 2016. But the US is the only country that has published multinationals’ financial data for 2017 and 2018.
Country-by-country reporting data for 2018 showed that 1,641 US multinationals made $2.6 trillion in profits that year, of which $1.1 trillion was earned abroad.
Bermuda, the British Virgin Islands and the Cayman Islands accounted for 13.5% of total foreign profits while, for example, China, where US companies employ 1.3 million people, captured 3%.
According to the data reported by US multinationals, 65% of overseas profits, or $720 billion, were either stateless, accrued in zero-tax offshore financial centres or countries that have higher statutory tax rates but low effective rates like the Netherlands or Singapore.
Tax transparency advocates the FACT Coalition, and investor groups with $2.89 trillion in assets under management, said in an open letter last month that investors require income and tax information at the country-by-country level “to better understand a company’s financial, reputational, and economic risks to make informed investment decisions”.
They added, “With global momentum growing to significantly change how multinational corporations are taxed – including through the [US] Administration’s tax change proposals and the OECD negotiations – investors now, more than ever, need information to inform them on how their holdings may be affected by changes to US tax law.”
The legislation was introduced by Senator Chris Van Hollen (D-Maryland) and Representative Cindy Axne (D-Iowa).
“For decades, we’ve accepted that publicly traded corporations should regularly provide operating information about their business to the public in the interest of those looking to invest in their company and those whose hard-earned dollars can be included in those investments,” Axne said in a statement. “But the current disclosure requirements do not adequately cover the realities of the modern world – and allow corporations to avoid US taxes, offshore US jobs, and underinvest in the workers that keep their companies strong.”
Although overseas profits are subject to some tax, Van Hollen said that under current law, a US corporation may use foreign tax credits to reduce US tax liability on foreign profits based on amounts the company paid in taxes on those profits.
“While this makes sense on a per-country basis, as President Biden proposes in the American Jobs Plan, the 2017 tax law’s use of a blended or ‘global rate’ for the minimum tax on foreign corporate profits provides a perverse incentive for companies to shift jobs and operations overseas in order to avoid the minimum tax on profits booked in tax havens,” he said in a statement.