Taxes Learn how to correctly analyse this topic.

Sarah Simon

21 min Read Time | March 10th 2022

Key takeaways

1

All businesses positively contribute to society by paying taxes, which are used by states to provide critical national services.

2

When covering the topic Taxes, your analysis should assess the company’s net tax contribution.

3

Even if a company enjoys tax subsidies and corporate tax deductions, by paying taxes, the impact value remains positive. The scale should capture how big or small the contributions are.

Executive Summary

All companies are subject to taxes and, through this contribution, they positively impact society by providing the funds for essential public services. 

The analysis should include information on the net and absolute amount of corporate taxes paid by the company over the past three years. 

Comparisons to the effective tax rate of the jurisdiction the company is subject to is very valuable and can help add nuance to the note.

What is it?

All companies contribute to society by paying taxes. Tax revenues provide the amount of resources required by a government to perform its administrative functions and support social issues, infrastructure, compliance, economic prosperity, etc. Overall, taxes often form the basis of a state’s income and they are used for the betterment of the economy and those living in it. Through taxation, citizens can enjoy health, education, justice, and equality of opportunities by accessing critical national services. Examples of these services include: health, education, justice, crime, welfare, culture, security, and environmental protection.

Depending on the nature of the company’s business, it would have to contribute to different types of taxes, including corporate taxes, social/payroll taxes, sales taxes (VAT) and, in the case of tobacco, alcoholic beverages, and energy products companies, excise taxes. For this topic, we are focusing solely on the first two: corporate and payroll taxes.

Corporate taxes are taxes on the yearly income of a company. These taxes vary greatly among countries and jurisdictions, and, as such, companies might be required to contribute a different share of their profits depending on where they are located. The legal share companies are required by law to contribute is referred to as the statutory tax rate of a country. Corporate taxes are sometimes eligible for legal deductions, subsidies and or deferrals which might result in different yearly effective tax rates, which is the actual percentage of its income the company is contributing to corporate taxes.

On the corporate level, companies sometimes engage in tax avoidance, which is the use of legal methods to minimise the amount of income tax owed by an individual or a business. This is generally accomplished by claiming as many deductions and credits as are allowable. Comparatively, tax evasion relies on illegal methods such as underreporting income and falsifying deductions. The difference between a company’s effective tax rate and the statutory tax rate of the country where it operates can provide useful information when it comes to assessing the company’s tax practices, i.e. claiming benefits and deductions, deferring taxes, etc.

Payroll taxes, on the other hand, are paid by a company on the part of its employees. Effectively, it is a percentage of its employees’ salaries that the company gives to the government. A company’s payroll tax contribution varies depending on the jurisdiction the company is subject to, the number of workers it employs and their salaries.

Sources

Taxes Definition
The Social Benefits and Economic Costs of Taxation
Tax Avoidance Definition
Corporate Tax Definition
What Is Tax Fraud?
Effective Tax Rate Definition
What Is the Difference Between the Statutory and Effective Tax Rate?
Payroll Tax Definitione
E WEB Goal 17

SDG Choice

SDG 17 is the most common SDG for the topic of taxes, to “strengthen domestic resource mobilization, including through international support to developing countries, to improve domestic capacity for tax and other revenue collection”.

Impact assessment

In your analysis, examine the company’s corporate and 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.

In general, a comparison of 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 and payroll 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 capture 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 effective tax rate?

Formula: Taxes paid over the past three years / Income before income taxes.

Sometimes, companies are not able to record a profit on all three years, or might face specific difficulties that might allow them to claim significant tax benefits and reductions.

You might come across the following scenarios when calculating corporate taxes:

  1. Profit for all three years
    1. Income taxes paid in all three years (ideal)

    2. Tax benefits receive in one or more years.

  2. Losses in at least one of the years:
    1. Income taxes paid in spite of losses

    2. Income tax benefits received in at least one year


Below is how to proceed in each of these scenarios:

Scenario 1a (ideal): profit in all three years, income taxes paid in all three years

Example: Nestlé

“In the period 2018-2020, based on the company’s income statement, Nestlé paid a cumulative USD $10.3 billion of corporate tax, corresponding to an average tax rate of 24%, in line with the global statutory tax rate.”

Income taxes 2018-2020: $3.589Mn + $3.179Mn + $3.516Mn = $10.3 billion

Pre-tax income 2018-2020: $14.849Mn + $15.159Mn + $13.282 = $43.29 billion

Effective tax rate: $10.3 billion / $43.29 billion = 0.238 = 24%

How to proceed step-by- step:

  1. Add taxes paid for the three years (i.e., $500 + $40+$60= $600)

  2. Add pre-tax income for all the three years

  3. Divide answer (a)/ (b) to calculate the effective tax rate and compare it to the statutory tax rate


Scenario 1b: Profit in all three years, tax benefits receive in one or more years.

Example: Adobe

“Despite generating a cumulative profit of $10.17 billion from 2018-2020, Adobe paid no income taxes on aggregate for the period. In 2020, despite making a profit of $4.1Bn, the company claimed tax benefits of $1.08Bn. In 2019, when it paid $254 million in corporate tax, its effective tax rate stood at 8%, below the global statutory tax rate”

Income taxes 2018-2020: $203Mn + $254Mn + (-$1,084) = -$627 million

Pre-tax income 2018-2020: $4.176Bn + $3.205Bn + $2.794Bn = $10.175 billion

Effective tax rate: Calculate the effective tax rate for the most recent year the company paid taxes. If taxes paid on average are 0 or negative, the title should focus on the fact that, in spite paying payroll taxes, on aggregate the company has not contributed to corporate tax over the past three years

How to proceed step-by- step:

  1. Add income taxes paid (including tax benefits) for all the three years (eg. $400 + $500 -$950= -$50)

  2. If the result in negative, please state the company has not paid any income taxes. If the result is positive, then please state how much the company has contributed to corporate taxes on aggregate over the 3 years.

  3. For the year(s) where the company reported profits and still benefited from tax deductions, please dedicate a line to briefly explain the situation.

  4. You can calculate the effective tax rate for the last year when the company made profits and paid taxes


Scenario 2a: Losses in at least one of the years, income taxes paid in spite of losses

Example: DXC

“Despite recording significant losses on aggregate, DXC paid over $1.2 billion USD of corporate tax from 2019-2021. In 2019, when the company last made substantial profits, the company paid $288 million, corresponding to an effective tax rate of 19%.”

Income taxes 2018-2020: $800Mn + $130Mn + $288Mn = $1.2 billion

Pre-tax income 2018-2020: Negative operating income for 2021, negative pre-tax income 2020 and $1.51 billion profit 2019

Effective tax rate for 2019: $288mn/$1,515mn = 19%

How to proceed step-by- step:

  1. Add taxes paid for all three years (eg. $400 + $500 +$950= $1,850)

  2. Add the profits for the three years, which would probably result in a negative number, which are the cumulative losses for the period.

  3. Calculate the effective tax rate based on the most recent year when the company reported significant profits


Scenario 2b: Losses in at least one of the years, income benefits

Example: GAP

“In the period from 2019-2021, based on the company’s income statement, GAP paid a cumulative $59Mn USD of corporate tax. This is partly due to the fact GAP recorded losses of $1.1Bn in 2021 due to the COVID-19 pandemic and received a tax benefit of $437Mn. In 2019, when the company made substantial profits, GAP paid $319Mn in corporate tax, corresponding to an effective tax rate of 24%.”

Income taxes 2018-2020: $319Mn + $177Mn - $437Mn = $59 million

Pre-tax income 2018-2020: Negative operating income for 2021, negative pre-tax income 2020 and $1.51 billion profit 2019

Effective tax rate for 2019: $319mn/$1,322mn = 24%

How to proceed step-by- step:

  1. Add total taxes paid during the three years including the (negative) tax benefit.(eg. $400 + $500 -$950= -$59)

  2. Calculate the effective tax rate based on the latest year when the company recorded significant profits

  3. Add a line that clarifies the losses of the year and the income benefits received


You might come across the following scenarios when calculating payroll taxes:

  1. Payroll taxes disclosed by the company

  2. No information on payroll taxes


Below is how to proceed in each of these scenarios:
  1. Payroll taxes disclosed by the company

Example: Nestlé

“The company paid (or collected) CHF4.5 billion (USD $4.8 billion) in payroll taxes in 2020 alone and the company claims that the total amount of taxes it paid or collected in that year was CHF13.9 Bn (USD $14.8 billion).”


2. No information on payroll taxes

Example: Walmart

“Based on an annual average salary of about $102,000, and a payroll tax rate of 15.3% in the US, we estimate that the company paid (or collected) around USD $25 Bn in payroll taxes in 2020 alone, just in the US through its contribution to Social Security and Medicare.”

  1. Consider where the company has most of its employees. If the company’s workforce has over 50% concentration in one country consider that country’s specific payroll taxes (for employee and employer) to calculate taxes paid. If the company has not broken down its workforce by country, you can use the global payroll tax rate to estimate the company’s payroll tax contributions.

  2. Try to use the company’s report to calculate avg. salary before using an external source.

CAUTION: Only estimate payroll taxes when the company employs over 1,000 people.

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 analyses 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:

  1. The cumulative corporate tax paid over the past three years (if the company paid them)

  2. The cumulative amount of property taxes the company has contributed over the past three years.

  3. 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

  • How long would the impact described last for? Months? Years? Decades?

  • How reversible is the impact described in the impact analysis? Can it be easily stopped/extended?


Ratings - The scale should capture how much taxes were paid:

  • If in full - the scale is on the higher-end,
  • If partially paid - the scale is on the lower end, but the impact remains positive.
  • 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.

Topic Webinar

Related
Articles

Based on the article you've just read, here are some more we think you'd be interested in.

11 Min read

Labour Practices

Learn how to correctly analyse this topic.

9 Min read

Job Creation

Learn how to correctly analyse this topic.

8 Min read

Step 5: Assess scale and value

Learn how to assess the analysis you are writing or reading.

World Green Background Sustainability small

Let’s take action together

With the right investment companies having a positive impact on the planet are able to flourish. Our community forms part of that mission by measuring their impact.

Join Us