Economix Blog: Untangling What Companies Pay in Taxes

The tax filings of companies, like those of individuals, are confidential. When individual companies want to make the case that they pay large amounts of tax – as many do – they often point to complex calculations from their financial statements that portray the companies in the best light. For an outsider, it can be hard to know how many accounting assumptions go into these calculations and how accurately they reflect the company’s actual tax payments.

But there is one standardized measure of corporate taxes that allows for meaningful comparisons among companies and industries. It is known as Cash Taxes Paid and appears in the public reports that companies are required to file for investors. The category reflects the combined amount of corporate income tax that a company pays in a given year, to foreign governments, the United States government and state and local governments.

This number often varies significantly from year to year, depending on a company’s accounting strategy and on how many tax breaks it qualifies for that year. As a result, a single year’s Cash Taxes Paid number can be misleading. But in a 2008 academic paper, three accounting professors — Scott Dyreng of Duke, Michelle Hanlon of M.I.T. and Edward Maydew of the University of North Carolina — suggested that looking at several years, at least, could offer insight into corporate taxes.

For a column for the Sunday Review this week, I asked SP Capital IQ, a financial research group, to collect the last six fiscal years of Cash Taxes Paid for the companies in the Standard Poor’s 500-stock index. Capital IQ then compared these numbers to the companies’ pretax earnings, including unusual items, for the same six years. Together, the two statistics create an effective tax rate for each company, as well for various industries.

The numbers show that oil companies and retailers pay relatively high tax rates, as you can see in this chart. Technology companies, pharmaceutical companies and utilities have lower-than-average tax rates. In all, the average rate for the S.P. 500 was 29.1 percent over last six years.

The number helps make clear that despite a relatively high official corporate income-tax rate of 35 percent in the United States, most companies do not pay nearly that much, thanks to loopholes. Remember: the 29.1 percent includes not only federal corporate income taxes but also foreign, state and local.

Soft-drink companies are among those paying taxes well below average, partly because of their ability to locate the manufacturing plants for soda concentrate in low-tax countries, as I discuss in the column. Coca-Cola paid a combined tax rate of 15.25 percent between 2007 and 2012, while PepsiCo paid 21.31 percent.

The companies chose not to discuss their tax strategies in detail with me, but each did issue a statement in response to my questions.

From Amanda Rosseter, a Coca-Cola spokeswoman:

The Coca-Cola Company is a compliant taxpayer globally, paying all legally required income taxes in the U.S. and every country in which our subsidiaries operate.

As a global company with products sold in more than 200 countries, more than 80% of our unit case volume is sold outside the United States. The fact that our effective tax rate is lower than some other companies in the S.P. 500 is reflective of the fact that less than 20% of our volume comes from sales in the U.S., which has one of the highest corporate tax rates in the world.

From Aurora Gonzalez, a PepsiCo spokeswoman:

We cannot comment on the tax rates of other companies or industries. PepsiCo’s tax rate is driven by the tax laws and regulations of the approximately 200 countries and territories in which we do business, and we pay all of our tax obligations in full.

Article source: http://economix.blogs.nytimes.com/2013/05/25/untangling-what-companies-pay-in-taxes/?partner=rss&emc=rss