2. Navigating macroeconomic and legislative challenges
The global economic environment continues to present challenges that have direct implications for tax accounting and reporting. Economic downturns in certain regions, changing interest rates and geopolitical uncertainties require careful consideration.
Decreased profitability may impact the recoverability of deferred tax assets, necessitating reassessment of valuation allowances (or recognition of deferred tax assets). Organizations that refinanced in 2024 or those planning to refinance in 2025 must consider the impact of these changes on cash flows and treasury needs. Asset impairments due to economic conditions may have tax consequences that require tax accounting attention.
Foreign exchange volatility can affect the tax cost of foreign operations and the translation of foreign tax balances. Rapid changes in tax laws, often enacted in response to economic conditions, can introduce new tax obligations or alter existing ones.
Tax accounting response
Tax teams should adopt a comprehensive approach to manage these challenges. Collaborating with finance and operations keeps tax teams informed about business performance, forecasts and strategic decisions. This collaboration enables timely reassessment of deferred tax assets realization and reinvestment of subsidiary earnings (outside basis differences), as well as evaluation of potential new tax attributes.
Remaining informed about tax law changes in all jurisdictions where the organization operates ensures the impact of these changes on tax positions and compliance obligations are addressed timely. Planning for foreign exchange impacts by monitoring currency movements and considering hedging strategies or other financial instruments also helps manage impacts and risks.
By managing these factors, tax teams can enhance the accuracy of tax reporting and support the organization’s business objectives.
3. Embracing public country-by-country reporting and ESG disclosures
The increasing emphasis on tax transparency and sustainability is reshaping expectations for tax reporting. Public country-by-country reporting (CbCR) and the inclusion of tax topics in ESG disclosures are becoming more prominent.
Stakeholders, including investors, regulators and the public, seek more detailed information about organizations’ tax practices, contributions and strategies. Ensuring that tax data reported in financial statements, CbCR and ESG disclosures is consistent and accurate requires robust data management and coordination across departments. Tax teams may not be primarily responsible for ESG reporting but they need to be involved to ensure tax perspectives are appropriately represented.
Tax accounting response
Tax teams should actively engage in the organization’s transparency and sustainability initiatives. Securing a seat at the table in sustainability initiatives enables tax teams to provide input on tax matters. Aligning data and reporting involves collaborating with finance, legal and sustainability teams to ensure tax data used in various reports (e.g., financial reports, tax filings, public CbCR, tax transparency reports) is consistent and accurate. Aligning data may involve reconciling differences between currently disparate financial and tax reports.
Developing a transparency strategy that considers the organization’s values and approach to voluntary disclosures can help meet stakeholder expectations. Companies should balance the benefits of transparency with the need to protect sensitive information. Improving processes and controls by implementing systems to monitor regulatory developments and collect and validate data required for public CbCR and ESG disclosures helps maintain data integrity.
By embracing transparency and integrating tax considerations into ESG initiatives, companies strengthen stakeholder trust and demonstrate their commitment to responsible tax practices.
4. New income tax disclosure requirements under US GAAP ASU 2023-09
The Financial Accounting Standards Board's (FASB) Accounting Standards Update (ASU) 2023-09 introduces significant changes to income tax disclosure requirements under US Generally Accepted Accounting Principles (GAAP) — effective for fiscal years beginning after 15 December 2024 for public business entities and for fiscal years beginning after 15 December 2025 for all other entities. (Early adoption is permitted.) These changes aim to enhance transparency and provide more detailed information about a company's income tax profile.
Tax accounting teams must prepare for the increased granularity required by the ASU, which mandates disclosures of income taxes paid disaggregated by individual jurisdictions, detailed information about enacted tax law changes, valuation allowances and carry forwards. Many companies may not currently collect the required data at the necessary level of detail, which could lead to demand for significant adjustments or upgrades to existing systems and processes.
Implementing the new disclosure requirements may strain tax departments already dealing with multiple year-end pressures. Companies also should evaluate and prepare for potential public and competitive implications of more transparent disclosures.
Tax accounting response
To address these challenges, the first step for companies is to understand the new disclosure requirements. Evaluating disclosure strategies carefully allows companies to present the required information in a way that meets compliance obligations while managing competitive sensitivities, and involving external auditors ahead of year-end can help identify potential issues and find an agreement on acceptable methodologies, reducing the risk of last-minute surprises.
By preparing early — such as developing a detailed project plan outlining compliance requirements, timelines, responsibilities and resource needs — organizations will be better prepared for 2025 and mitigate rework later.
5. Preparing for the “sunset” of US TCJA provisions
Several key provisions of the US Tax Cuts and Jobs Act (TCJA) of 2017 will expire at the end of 2025, presenting challenges and opportunities for businesses. The expiring provisions will affect a mix of tax deductions and credits, altering tax strategies and financial positions.
Tax accounting teams should model the effects of these changes to understand how they may impact the organization’s tax liabilities, deferred tax assets and overall tax strategies.
Tax accounting response
Tax teams should stay informed about tax policy discussions, proposals and legislative actions that could affect TCJA provisions, anticipate changes, and plan accordingly. Conducting scenario analysis by modelling various outcomes can help assess potential impacts on the organization’s tax position and financial statements.
Additionally, reviewing existing tax strategies – including the use of deductions, credits and deferrals – enables optimization of the organization’s tax position in light of potential changes. Assessing deferred tax implications involves analyzing how the expiration of TCJA provisions may affect the measurement of book-tax basis differences, realization of deferred tax assets, and cash needs and related cash movements within the organization.
Taking these actions ahead of year-end can help address risks associated with legislative changes and position organizations for change.
6. Accelerating year-end tax accounting work
Year-end financial statement close is a stressful time for many tax teams as they juggle complex, time-consuming tasks needed to prepare year-end accounts and disclosures and prepare for the coming year. The fast-changing tax legislative and administrative environment is increasing risk and stress related to year-end close.
Tax accounting response
To reduce the strain on tax teams, many elements of the year-end tax provision can be concluded ahead of year-end. Businesses should consider taking steps to pull work out of the year-end close cycle to reduce stress and risk associated with short close cycles and last-minute changes.
Some tangible actions teams can take now include:
- Documenting provision-to-return adjustments
- Substantiating deferred tax rates
- Reconciling post-provision-to-return deferred tax and current tax balances
- Documenting the design and performance of internal controls over tax processes
- Documenting estimated tax payments
- Assessing uncertain tax positions
- Analyzing the need for valuation allowances (recognition of deferred tax assets)
- Evaluating anticipated reinvestment assertions
- Calculating the tax effects of discrete transactions and new tax planning strategies
- Working with external auditors to review accelerated items
Accelerating some, or all, of the above items can significantly reduce time otherwise spent during the year-end close process to prepare tax accounting workpapers, enabling teams to focus on higher risk matters and devote more time to ensuring quality in the calculations and documentation that cannot be accelerated.
Looking ahead
We are in a new age of tax reporting shaped by business disruption, evolving tax policies and sustainability. Expanding tax reporting requirements demand innovative and progressive thinking from tax teams. Teams need to comply with new reporting requirements, stay on top of evolving tax legislation, sustainability standards and continually changing business circumstances, and prepare for additional tax controversies.
Taking a proactive approach ahead of year-end can improve accuracy in tax reporting and enables tax teams to deliver value to the business by capturing new opportunities. By focusing on these six key areas – global minimum taxes, macroeconomic and legislative challenges, new income tax disclosure requirements, the sunset of TCJA provisions, transparency initiatives and accelerating year-end tax accounting work – tax teams can navigate the complexities of the current environment and position their organizations for success in the year ahead.
Summary
The tax department should collaborate with finance and business functions to align tax reporting with developments across the organization while ensuring routine tasks are executed efficiently. As tax requirements become more complex and faster-paced, tax teams should position themselves for a successful year-end close and contribute to the wider agenda of the organization.
