Authored By: Minah C. Hall & Jennifer A. Carroll
The Statement is concerned with “Tax Abatements,”which GASB defines broadly as any “mechanism used to reduce taxes,” including “exemptions, deductions, credits, rebates, and abatements,” stating these terms “are used interchangeably to describe similar transactions.” Therefore, this proposed language may concern all manner of economic development programs offered by all state and local governments relating to tax revenue, with few exceptions including, cash grants, free land, and utility rate reductions. The Statement is only applicable to economic development agreements that are tax related and formalized by an agreement with ongoing obligations of both the government entity and taxpayer. Some examples of programs that would be subject to these sorts of disclosures include the Illinois Economic Development for a Growing Economy (“EDGE”) Tax Credit , the Florida Qualified Targeted Industry (“QTI”) Tax Refund, and the Texas Enterprise Zone program, to name a few. GASB explicitly notes “[t]he intention of this Statement is not to encompass all forms of tax expenditure[s],” but only those used for the purpose of economic development, whereby reducing tax revenue and summarized in an agreement as the basis for the reduction in tax.
The Statement also excludes broad tax exemptions and deductions for tax expenditures whereby the taxpayer performs the incentivized activity prior to the government commitment to reduce tax liability (e.g., tax credits for installation of energy-efficient appliances or fixtures). GASB proposes governments engaged in tax-related economic development agreements disclose the following information on their financial statements:
The Statement does not request disclosing the tax-related economic development agreement recipients’ names, duration of the incentive, or information regarding the recipient’s compliance with its commitments nor does it provide guidance when an entity may choose to aggregate the tax-related incentive agreement information by program, as opposed to disclosing the agreements individually.
Comments to GASB related to this Statement are due January 30, 2015. Companies already a party to tax-related economic development agreements and those interested in becoming parties in the future should be mindful of the potential consequences of this disclosure, including additional compliance, and public disclosure of confidential company information. Similarly, government entities should review their economic development toolbox to determine the impact of this Proposed Statement on their financial reporting, and potentially seek to implement non-tax related alternative economic development incentives, such as cash grants, utility rate reductions, free land, low-cost financing, and workforce training. Alternatively, the Statement as currently written would allow for non-disclosure of incentives if entered into without an agreement. Furthermore, if the agreement is entered into post-performance, then the factor requiring an agreement entered into prior to the performance by the taxpayer is eliminated.
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Our team of knowledgeable professionals provides advice and performs services to assist in all aspects of credits and incentives negotiation and compliance. True Partners Consulting's Credits and Incentives team will continue to monitor the developments of this Statement. Should you have concerns about the Statement’s impact on your company and your current or future incentives pursuits, or wish to discuss submitting a Comment to GASB outlining the advantages and disadvantages of this Statement, our professionals would be happy to discuss your specific situation.
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