Global Corporate Tax Reform:  Implications for Investors and Accounting Standard Setting


Todd Castagno


Over 130 countries recently signed a groundbreaking agreement to reform international corporate taxation. The agreement is orchestrated by the Organization for Economic Co-operation and Development (OECD) and is also endorsed by the influential G20 Forum. These changes will have implications investors need to be aware of.

The OECD’s proposal is anchored on two pillars:

  • Pillar I seeks to redistribute the taxing rights of the ~100 largest multinationals to countries based on where products and services are transacted.
  • Pillar II proposes to establish a 15% minimum effective tax rate structure for large multinationals to discourage profit shifting and tax minimization. 

 Jurisdictions may begin to legislatively adopt as early as 2023.

Assessing Economic Tax Risk

The potential for increased taxes is an obvious economic risk for in-scope companies and investments.  However, quantitatively estimating such risks is challenging given the rules are still being written.  In addition, current income tax accounting disclosures are inadequate for investors to assess jurisdictional tax risks.  IFRS and US GAAP do not require country or regional level disclosure. Rather, investors are limited to a binary domestic versus foreign classification. Investor advocates, including CRUF, have long sought enhanced granularity to better assess tax risks in a dynamic and evolving globalized world.  Standard setters have yet to respond even as income tax disclosure improvements are a persistent agenda priority for many investors and investor groups.

Book-Tax Conformity

In order to reallocate profits (Pillar I) or to establish a minimum level of tax (Pillar II), one must measure profits consistently over time and across jurisdictions. As each sovereign maintains its own tax laws and tax accounting methods, the OECD proposals opportunistically rely on financial reporting standards (IFRS/GAAP) as a baseline, subject to certain adjustments.

A financial reporting tax base should concern investors and stakeholders. The objectives of a financial reporting system are not aligned with the objectives of an income tax system.  Financial reporting seeks to provide investors and stakeholders with a measurement of economic performance.  Tax accounting systems are primarily designed to generate national revenue and to encourage certain types of behavior and investment in the particular jurisdiction.

Most tax systems orient around cashflows and realizations to measure taxable profits and income, where financial reporting standards are grounded on accrual concepts.

For instance, many jurisdictions have tax policies that provide immediate or accelerated expensing of capital investment. The goal is to advance deductions and reduce near-term taxable income in order to incentivize productive investment.  In contrast, financial reporting standards seek to allocate expense recognition over the useful life of the asset, which is a more accurate reflection of economic activity.

Additionally, many jurisdictions provide tax credits to incentivize activity such as R&D and renewable energy investments. These credits reduce tax obligations but are not recognized in reported operating profits.

A tax system reliant on financial accounting standards may achieve systematic harmonization, but also risks overriding or negating key features that incentivize productive economic activity.

Risk to Accounting Standard Setting

Investors should also be concerned with the potential politicization and erosion of high-quality financial accounting standards. Converging book and tax accounting rules will encourage accelerating of expenses and deferral of revenue recognition. Forthcoming changes in accounting standards may materially impact a company’s tax incidence, and likewise, may materially impact a government’s tax revenue base.  In a sense, the ‘tail wags the dog’ as accounting rules carry economic implications.  This risks straining the independent standard setting process as governments, lobbyists and special interest groups become more involved in shaping the reporting framework.

Indeed, research has demonstrated that in countries where the financial and tax accounting relationship is strong, the conformity provides incentives to maximize cash flows through earnings management and reporting lower financial statement profits. Management may also be incentivized to increase utilization of pro forma, or non-GAAP/IFRS, definitions of profitability with investors.


The current tax proposals have reached broad agreement at the international level, but there is still uncertainty if and when sovereign governments will formally adopt via legislation. Investors should continue to monitor developments not only to assess future tax risk, but risks to accounting standard setting as a result of greater book-tax conformity. Engagement with policymakers and standard setters can help balance the needs of investors and taxing authorities. 

Todd Castagno is an Executive Director and Global Head of Valuation, Accounting & Tax within Morgan Stanley’s Research division. He publishes research on accounting, tax, and valuation topics. Todd helps oversee internal valuation and modeling methodologies and is a member of Morgan Stanley’s Research Stock Selection Committee. Todd also serves on the Financial Accounting Standards Financial Accounting Standards Advisory Council (FASAC). Todd is a CFA charterholder and a Certified Public Accountant. He has chaired CRUF USA since 2015.

Disclaimer: The views expressed in the blog are those of the author and do not necessarily represent the views of all CRUF participants. To read more about the CRUF’s views on this and other topics, please visit the ‘Our Views’ section of this website.


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