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, 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 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 ccompany'sjurisdiction, 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:
- Profit for all three years
Income taxes paid in all three years (ideal)
Tax benefits receive in one or more years.
- Losses in at least one of the years:
Income taxes paid in spite of losses
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:
Add taxes paid for the three years (i.e., $500 + $40+$60= $600)
Add pre-tax income for all the three years
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, despite paying payroll taxes, the company has not contributed to corporate tax over the past three years.
How to proceed step-by-step:
Add income taxes paid (including tax benefits) for all the three years (eg. $400 + $500 -$950= -$50)
If the result is 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.
Please dedicate a line to briefly explain the situation for the year(s) where the company reported profits and still benefited from tax deductions.
If the company has paid taxes on aggregate for the period, then please estimate the effective tax rate as in scenario 1a, that is, by adding the cumulative taxes paid and dividing by the cumulative profits for the three years. If the company has not paid taxes on aggregate, you can calculate the effective tax rate for the last year when the company made profits and paid taxes. When doing so, please state what year this effective tax rate refers to. This is meant only to add nuance to the note.
Scenario 2a: Losses in at least one of the years, income taxes paid despite 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:
Add taxes paid for all three years (eg. $400 + $500 +$950= $1,850)
Add the profits for the three years, which would probably result in a negative number, which are the cumulative losses for the period.
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:
Add total taxes paid during the three years including the (negative) tax benefit.(eg. $400 + $500 -$950= -$59)
Calculate the effective tax rate based on the latest year when the company recorded significant profits
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:
Payroll taxes disclosed by the company
No information on payroll taxes
Below is how to proceed in each of these scenarios:
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.”
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.
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:
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.
