Companies that Pay Little in Taxes

Posted by: Nanette Byrnes on April 24, 2009

Some interesting comments coming in on a study we published this week on corporate taxes — the big payers and those who pay very little. (Here’s the link to interactive tables of both ends of the spectrum: the high and low.)

One reader tells how taxes affect corporate actions in important ways:

I worked for a large multinational who had large operations in the U.S. I did strategic planning and analysis for global sourcing. Effective tax rate for the U.S. portion of this multinational was 39% (state and federal), while operations in Switzerland and Belgium had effective tax rates of 3% and o% respectively… As a result, we closed/moved existing U.S. facilities, and made new capital investments there as these low tax rates favored those countries even though labor and utilities and distribution costs (back to the U.S.) were significantly higher. Don’t let anyone tell you that high U.S. corporate tax rates don’t cause U.S. businesses to move offshore. I experienced it first hand.

Other readers wrote about small businesses, companies that don’t have the resources to take full advantage of the tax code’s many corporate breaks. Some comments debate the alternative to the convoluted tax code: a sales tax across the economy.

Taxes are one of the murkiest areas of corporate finance to get a handle on. These are important perspectives that add a lot to the story.

So if you’ve seen corporate taxes up close, please add your two cents. (If you still have them after April 15.)

Reader Comments

Nutty Tax Professor

April 29, 2009 5:34 PM

It is nice to see someone (outside of academia) studying effective tax rates (ETRs), but there are several problems--some of which are noted below--with the study.

Namely, the cash taxes paid as shown on the statement of cash flows (SCF) represents all taxes (payroll, property, sales, income, et cetera) rarely represents the firm's income tax liability. For instance, most firms make estimated tax payments and generally keep funds on account so to speak at the IRS. A simple example is as follows: Suppose a firm has made estimated tax payments totaling $1,000. Suppose this same firm has a tax liability due and payable of $300 and chooses to forego a refund of $700 and instead have the $700 applied to next year’s tax liability. The firm would report on its SCF taxes paid of $1,000 even though the firm’s actual tax expense was $300.

A better proxy is the firm's reported ETR, which is reported and required (by the SEC and FASB) as part of the tax footnote to the financial statements. Even so, this proxy is quite noisy for many reasons and I’ll note a few:

1) Book income and taxable income differ in many ways and are governed by two separate bodies (FASB and US Treasury);

2) The entities included in the financial statements might not correlate with the entities included in consolidated tax return;

3) The US GAAP treatment of certain stock options cause severe ETR distortions and can lead one to conclude that firm’s have a book tax expense when actually the firm might not have a federal tax liability;

4) The reported ETR is book tax number and bears little relation if any to what is listed on the US tax return; and finally

5) More often than not firms who have losses in low tax jurisdiction tend to show grossly over stated ETRs.

Until we can get our hands on the actual tax returns, the reported ETR is our best and sometimes worse proxy for the firms US tax liability.

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