Large companies find ways to a zero tax rate: YOU AND I PAY MORE AND CORPORATIONS PAY NOTHING AND TO SOME IN THIS PARTY THAT IS FAIR? NO, I HAVE HAD ENOUGH. Despite widespread groans about the recent disclosure that Apple is finding ways to cut its federal tax bill, an analysis shows the computer giant is one of scores of corporations largely dodging the taxman. A surprising number of companies in the Standard & Poors 500, 57, have found ways to pay effective tax rates of zero, according to a USA TODAY analysis of data from S&P Capital IQ. The effective tax rate is a popular measure used by investors to compare how much companies pay in tax relative to profit. The news comes months after after the Government Accountability Office released a report showing that companies in 2010 reported an average effective tax rate of 12.6%, well below the 35% federal corporate tax rate. Corporate giants such as telecom firm Verizon, drugmaker Bristol-Myers Squibb and power management firm Eaton, all reported effective tax rates of 0% during the past 12 months. The findings underscore that while many companies bellyache about the top federal income tax rate of 35%, in reality, many pay much less than that, says Nick Yee of Gradient Analytics. Investors hope company management is doing everything they can to generate profit, legally, he says. But the tax code is gray, and theres often no set guidance. Some ways companies are driving their effective tax rates to zero include: • Offshore transfer payments. One of the favorite ways for companies to slash their tax bills is by setting up foreign subsidiaries to make raw materials and components in countries with low tax rates. The companies U.S. operations then purchase these parts from the foreign units at well above cost. By doing this, the overseas unit makes a large profit, which then escapes U.S. taxes, as long as it stays in the foreign country, Yee says. Transfer payments are used at Bristol, Forest Labs, Agilent Technologies, Eaton and Lam Research, he says. Many companies are likely waiting for a U.S. tax-holiday, giving them a chance to bring the cash to the U.S. tax-free, Yee says. Agilent and Bristol declined to comment. The other companies didnt respond. • Harvesting losses. Most of the companies with effective tax rates of zero, or even negative, are money losers. While Hewlett-Packard, J.C. Penney and E-Trade pay taxes, since they lose money, they have negative effective tax rates due to the way the number is calculated. Yet, some big companies that have lost money in the past accumulate credits that can be used to offset tax bills in future years. These reserves can be very lucrative and give profit a boost by lowering the effective tax rate, Yee says. Companies with these tax loss reserves include General Motors and Crown Castle, he says. GM, for instance, released credit from its reserve, taking it down from $45 billion to $11 billion. Investors must be aware, though, that once that $11 billion reserve is used up, the companys tax rate returns to the statutory rate. All this follows tax rules, but investors need to be aware. This isnt anything illegal, but the reserve will run out, Yee says. GM declined to comment. The other companies didnt respond. • Accounting rules. A big reason that Verizons effective tax rate is so low, coming in at a negative 4.8%, is largely due to accounting. The companys sped-up depreciation, severance and pension costs are large credits that contribute to pushing the companys taxes down, says Jonathan Schildkraut of Evercore. But theres also a distortion caused by the companys 55% interest in Verizon Wireless. Vodafone, which owns 45% of Verizon Wireless, pays taxes on its share, but the entire profit is reported on income. Adjusting for this, Verizons effective tax rate is closer to 30%, the company says. Verizon is buying Vodafones stake, which will eliminate the issue in the future. Similarly, real estate investment trusts have low effective tax rates because they pass profit to shareholders, who then pay the taxes. The question for investors is whether or not companies paying low effective tax rates might, eventually, attract the attention to regulators. They are slow at getting at these issues, Yee says. S&P 500 members citing effective tax rates of 0% in past twelve months, ranked by market value (in billions): Verizon: $146.4 MetLife: $53.9 Eaton: $32.7 Regeneron Pharmaceuticals: $29.6 Public Storage: $29.5 Ventas: $19.3 Avalonbay Communities: $17.4 Agilent Technologies: $16.9 Vornado Realty Trust: $16.8 Boston Properites: $16.7 Seagate Technology: $15.9 Broadcom: $15.7 News Corp.: $9.8 Lam Research: $8.8 Kimco Realty: $8.6 Waters: $8.5 Macerich: $8.3 Plum Creek Timber: $8.4 PulteGroup: $6.4 Apartment Investment & Management: $4.3 Perkin Elmer: $4.2 Source: S&P Capital IQ
Posted on: Sat, 26 Oct 2013 04:39:45 +0000
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