In your analysis, examine the company's corporate tax contributions over the past three fiscal years. Include the absolute amount of corporate taxes the company contributed over the period, as well as its yearly payroll tax contributions if disclosed directly by the company.
In general, comparing the effective tax rate and the statutory tax rate the company is subject to makes the note nuanced.
To assess the company's impact, consider its absolute contribution to corporate taxes. As long as the company is contributing in some measure to taxes, the impact remains positive. Any benefits or deductions the company claimed to minimise its income tax would be reflected in the scale of the impact.
Introduction
The introduction should include context information on the importance of taxes to society, data on the average global corporate tax rate and, if the company operates in just one jurisdiction, more precise data on the specific jurisdiction’s statutory corporate tax could also be added.
Below is the model introduction for tax notes:
In order to ensure strong institutions and the well-being of society, governments spend a considerable amount of the state's budget on public goods and services, which are funded by taxes paid by individuals and corporations1. Corporate taxes accounted for an average of 10% of all tax revenues received by the OECD countries in 20182;p2. On average, the statutory corporate tax rate currently stands at 24% globally3.
Core Analysis
A note on taxes should include the following key elements:
According to the company's jurisdiction, how much should it pay in total taxes (Statutory tax rate)? If the company operates globally, please include the global statutory tax rate.
How much did the company actually pay in taxes in absolute terms over the past three years? This should be expressed in total USD or EUR
What is the company’s effective tax rate?
What is the difference between the statutory and the effective tax rate?
How much did the company contribute in payroll taxes?
CAUTION: The topic should not focus on tax evasion or avoidance, as this is a secondary point. While this is undoubtedly a dimension to include in the analysis, it is essential to capture the whole picture (e.g., how much has the company paid vs. what they should have paid). Tax avoidance would be effectively captured by comparing the company’s effective tax rate vs. the statutory tax rate.
As tax evasion is illegal, this could be treated under another topic.
Regardless of the amount paid, the analysis will remain
positive. The scale of the rating can reflect the scale of the company’s contributions.
Where are the company’s corporate tax contributions disclosed?
All public companies disclose their yearly financial results in their financial statements. These are usually found on the company’s website. Macrotrends can be a useful source of information as well.
Yahoo Finance, on the other hand, has proved to be inaccurate. Please exclude this source of information for this topic.
In the company’s financial report, you will find its Consolidated Income Statement. There, you will find Income Taxes paid by the company over the financial year.
CAUTION: When looking at the company’s financial statements, only use its Consolidated Statements of Income and not its Consolidated Statement of Cashflows, which might also include income taxes.
How to estimate a company’s cumulative taxes paid?
To estimate the cumulative corporate tax contributions of a company over the past three years, add each year's tax contributions, i.e:
2020 tax contributions+ 2021 tax contributions+ 2022 tax contributions = total taxes paid over the past three years.
Please bear in mind that sometimes companies might not contribute to taxes or might get tax benefits over one or more years. In these cases, companies usually report these values as negative numbers. To estimate cumulative taxes paid over the period, include the negative values in the addition. It is likely that total tax contributions over the period are negative or amount to zero. If so, we consider the company has not paid taxes on the aggregate over the past years. Despite the fact that cumulatively over the period the company did not contribute to taxes, please dedicate some sentences to explaining the situation to the reader.
How to estimate a company’s effective tax rate?
Formula: Taxes paid over the past three years / Income before income taxes over the same period of time.
Sometimes, companies are unable to record a profit for all three years or might face specific difficulties that might allow them to claim significant tax benefits and reductions.
When to estimate the effective tax rate?
A company's effective tax rate should be included in the analysis when:
a. The company recorded a cumulative profit over the past three years and cumulatively contributed to income taxes
AND
b. The resulting effective tax rate is under 100%
If only one of these conditions is met, please do not include the effective tax rate calculation in the analysis.
When to include Social Security Contributions?
Social Security Contributions should be included only when the company has directly disclosed the information in its report. Otherwise, please expand on the importance of Social Security taxes for society's well-being. You can use the following model.
However, the corporate taxes paid may only be the tip of the iceberg as Social Security contributions alone account for a quarter of total tax received by the OECD States on average (Source page 2). Through Social security contributions, countries are able to fund and provide critical essential services for their population, including the underserved, contributing to social inclusion and the reduction of poverty (source).
Please refer to the key example: Over the past three years, Nestlé has contributed about USD9 billion in corporate taxes
Taxes for Real Estate Investment Trusts (REITs) Companies
REIT companies' tax schemes can be complex. In general, these companies are legally not subject to taxes at the corporate level, which is why they might contribute little to nothing in corporate taxes. Their major tax contributions are in the form of property taxes.
REIT tax schemes vary greatly from country to country, so we’ve devised two main ways to treat this topic depending on where the company operates.
Below you will find a model analysis for REIT companies. It is structured in five parts, namely:
1. Introduction to the topic
2. Introduction to the company
3. REIT tax disclaimer
4. taxes paid by the company
5. Conclusion
For Point 3: REIT tax disclaimer to be included in all REIT tax notes:
Although Real Estate Investment Funds (REIT) are subject to tax in all jurisdictions, they are subject to tax schemes that vary greatly between nations4. Because of their constitutive nature, REIT companies often pay a small percentage of income taxes at the corporate level9.
For point 4, please include the following:
The cumulative corporate tax paid over the past three years (if the company paid them)
The cumulative amount of property taxes the company has contributed over the past three years.
To add nuance, property taxes paid during the period could be expressed as a percentage of the company’s revenue over the same years. (i.e., “this represents nearly 10% of the company’s revenue over the same period”)
Property taxes are usually disclosed by these companies in their financial statements. They might be disclosed on their own or under property-related expenses. Please keep in mind that companies might call these tax contributions slightly differently, and thus you might find the information under “property taxes” or “real estate taxes” or the particular related name the company has chosen. For this reason, it is important to look at the companies on a case to case basis. This is especially relevant for non US REIT companies which might not disclose property taxes paid but might disclose other significant tax contributions that we would like to capture.
Regarding payroll taxes:
REITs tend to have a reduced number of employees. If a REIT company is employing under 1,000 people, their social security tax contributions are negligible, so this part can be skipped.
Model: Public Storage
In order to ensure strong institutions and the well-being of society, governments spend a considerable amount of the state's budget on public goods and services, which are funded through taxes paid by individuals and corporations1.
Public Storage is a Real Estate Investment Fund (REIT) and the largest owner and operator of self-storage facilities in major markets worldwide, operating mainly in the US3;p4-5. In 2020, the group had about 5,400 employees3;p9.
Although Real Estate Investment Funds (REIT) are subject to tax in all jurisdictions, they are subject to tax schemes that vary greatly between nations4. Because of their constitutive nature, REIT companies often pay a small percentage of income taxes at the corporate level9. In the US, REIT companies are subjected to property taxes8.
From 2018-2020, Public Storage paid no income taxes3;p32. At the same time, from 2018 to 2020, the company paid a total of $718.35 million US dollars in property taxes, nearly 10% of its total revenues for the period3;p32.
In addition to property taxes, Public Storage contributes to Social Security taxes. Unfortunately, Public Storage does not disclose its social security or payroll taxes in its report3;p32. Based on Public Storage’s average salary of around $113,8005 and a global payroll tax rate (for employee and employer) of 25%6,7, we estimate the company paid (or collected) around $154Mn in payroll taxes in 2020 alone, worldwide, through its contribution to Social Security.
Public Storage’s property and payroll taxes contribute to the provision of public goods and services that strengthen institutions and countries' security while improving people's well-being.
Make sure to describe the scale of the impact by taking into account:
1/ The breadth of the impact
Is the impact local, national, or global?
How many people are concerned? Thousands? Hundreds of thousands?
2/ The depth of the impact
Is the life of people concerned deeply affected, or does the issue just marginally impact them?
Are the changes brought by the issue profoundly changing society or the planet?
3/ The persistence of the impact
Ratings - The scale should capture how much taxes were paid.
- Breadth: consider the absolute amount of taxes paid by the company over the period.
- Depth: ask yourself how much this contribution impacted public services and goods.
- Persistence: ask yourself how consistent the company’s contributions have been over the said period of time.
- It is very useful here to compare the company’s effective tax rate with the corresponding statutory tax rate.
- If the company evaded taxes (different topic), this means that there was a negative tax rate. In other words, the government provided funds instead of the company paying taxes. Only here is the impact negative.
