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Home / Business / However, after the tax overhaul in the US, corporate rates are falling unevenly

However, after the tax overhaul in the US, corporate rates are falling unevenly



The tax reform in the US has lowered tax rates for many companies, and many other companies that were already at the bottom of the scale have been able to stay there, according to a Wall Street Journal analysis.

The lower tax rates follow tax law changes The congress was adopted at the end of 2017. Since then, the average effective global tax rate for S & P 500 companies has fallen from 25.5% in the previous year to 19.8% in the first quarter of 2019.

This meant that the third quarter in a row was below 20% and in line with the goals and structure of the tax overhaul, which reduced federal interest rates from 35% to 21%. The authors of the bill wanted to help US multinationals survive on overseas markets and help high-tax domestic companies, while lowering the value of tax credits and making single-digit tax rates difficult.

Much of the decline is due to it According to the journal analysis, fewer companies pay the highest installment rates. Only 28 companies, including mining giants

Freeport-McMoRan
Inc.

and

Chevron
Corp.

The Tax Cuts and Jobs Act of 201

7 limited the deductions and introduced new minimum taxes on foreign income, though only partial changes were delayed until after 2020. Thus, 119 S & P companies were included

Adobe
Inc.

and

General Motors
Co.

In the first quarter worldwide tax rates below 12% paid. That's 93 companies before the overhaul.

Typically, companies do not disclose what they pay to the Internal Revenue Service per tax year. However, public companies disclose their effective tax rates: the measurement of taxes that accrue in accordance with generally accepted accounting principles as a share of input tax.

These rates reflect global results and include foreign and state taxes, not just what companies owe to the US Treasury. The quarterly results may fluctuate due to one-time events. For many large companies, however, US federal taxes are the most important component.

A quarter of S & P 500 companies reported effective global tax rates below 21% over the last four quarters. With a number of discounts that reduce tax burdens, including a deduction on corporate research exports and credits, companies can even pay less for US earnings than required by law.

In the Journal's analysis, the tax rates for the last three months of 2017 and the first three months of 2018, when many companies made major, one-time changes, were not taken into account by the tax law. The same happened when real estate companies, which tend to have very low tax rates, were left out. (For more information, see methodology note.)

An analysis separate from S & P Dow Jones indices showed similar shifts in income tax rates for S & P 500 companies since the entry into force of the tax law.

Outside the US, local currency companies pay tax rates that can be much lower than the IRS fees. In some cases, these low exchange rates trigger a new residual tax in the US. The GILTI (Global Immangible Low Taxed Income) provision aims to ensure that companies pay at least 10.5% of most foreign income. These factors vary among companies, as well as regular settlements with the tax authorities, the composition of the countries in which profits are booked, and other anomalies.

The decline in the average effective tax rate points to a possibly more significant shift: the range of tax rates reported by most large companies has fallen under the new law.

In a broader sense, the compression of corporate tax rates was one of the objectives of the revision. Those paying the most, including domestic companies such as retailers and utilities, could expect a lower price, while those with the lowest tax rates, often tech and pharmaceutical companies, some of whom claim to have carried out offshore tax avoidance, with a higher one Price could count on GILTI.

Lower tax rates

Distribution of tax rates for S & P 500 companies before and after the entry into force of the 2017 overhaul.

Take, for example

zoetis
Inc.,

a manufacturer of veterinary medicines. The tax rate fell from 28% two years ago to 18% in the first quarter. While much of this decline was attributable to the reduction in the corporate tax rate, changes outside the US and one-off adjustments to the financial statements also had an impact.

Zoetis said his worldwide tax rate had dropped 7 to 8 percentage points as a result of the tax overhaul. The company announced that GILTI's global minimum tax is expected to increase the tax rate by approximately 1 percentage point in 2019. This tax is just beginning to burden the company in 2019 as the foreign subsidiaries begin their fiscal year.

Lower rates mean less tax revenue for the government. To date, the federal government has raised $ 164 billion in corporate taxes this year, 2% more than a year earlier, as the economy continues to grow, but 26% less than in the same period before the tax law came into force.

Not all companies have lower tax rates. About a quarter of the S & P 500 reported rates that matched those before the overhaul and about 17% said their rates had risen by 5 percentage points or more in recent quarters.

A company with steady growth was

Hanesbrands
Inc.

The company reported a tax rate averaging 14% over the four quarters in the journal analysis after the entry into force of the tax code, compared with an average of just under 6% before the change in tax law.

The new global minimum tax and one additional provision increased the tax rate of Hanesbrands in 2018 by about 2.3 percentage points according to tax legislation. Around 60,000 of its 68,000 employees work in facilities outside the United States. "Due to the ownership and operation of our own global supply chain, our tax rate is lower than the US statutory rate," said a Hanesbrands spokesman. "This is one of the benefits of our business model of owning and operating the majority of our global supply chain."

Policy makers added several provisions to the tax code, including GILTI's global minimum tax, to make it more difficult for companies to make profits foreign tax jurisdictions at ultra-low tax rates without paying additional US tax.

Some companies with very low tax rates have been able to maintain them for the time being. According to Adobe, the fiscal year ended in November, so the GILTI tax and other provisions of the new law did not enter into force until this fiscal year.

semiconductor manufacturers

Xilinx
Inc.

quarterly tax rates of about 6% to 13% before the new law, compared with 6% to 11% after the revision.

In both periods, the chip designer – with products used in 5G network devices – benefited from the fact that most of its pre-tax revenue was from foreign markets: 82% last year.

Xilinx, which has a regional headquarters and manufacturing facility in Singapore, has been pioneered by the government and benefits from a zero tax rate until fiscal year 2021.

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The company said its obligations under the GILTI tax on foreign income offset part of the benefits from low exchange rates. Nevertheless, the company's global tax rate has been below 11% for the past four quarters and below 7% in two quarters.

A Xilinx spokesman declined to comment on the disclosures in his filings.

WSJ Methodology [19659033] The Journal analyzed quarterly statements for companies in the S & P 500 Index. He calculated the tax rates by dividing the income tax provision by the pre-tax result provided by the financial database Calcbench.

The quarterly periods have been adjusted so that the quarter, including the date of entry into force of the Taxes Act, on December 22, 2017, was treated as fourth quarter of 2018 for all companies and the other quarters were renamed accordingly. Results for the fourth quarter of 2017 and the first quarter of 2018 were generally not included in the analysis, as many companies' tax rates were dramatically distorted by one-off accounting effects from regulatory compliance.

Corporate tax rates can vary dramatically from quarter to quarter for a variety of reasons, including collusion with tax authorities and the impact of mergers and acquisitions. In the analysis, median tax rates were used to minimize the distortions caused by outliers. Due to the volatility, the 10% of the companies with the highest tax rates and the 10% with the lowest tax rates in each period were omitted in the analysis of tax rate convergence.

Write to Theo Francis at theo.francis@wsj.com and Richard Rubin at richard.rubin@wsj.com.

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