Global chemical companies' effective tax rates have increased slightly at 2.4 percent between 2003 and 2005, according to PricewaterhouseCoopers’ second annual Tax Benchmarking Survey for the Chemical Industry, released on September 10. The three-year average effective tax rate (ETR) for the 46 leading global chemicals companies included in this study is 29.5 percent.
Rising tax rates in 2005 indicate that increased financial scrutiny may have resulted in reduced reserves being recorded.
“A combination of high-profile corporate failures, tax restatements and regulation have clearly established tax as a key area of risk on the boardroom agenda,” said Michael W. Burak, PricewaterhouseCoopers’ global tax leader, Chemicals Industry. “Companies are under increased pressure from the tax authorities as well as the SEC in connection with corporate income tax planning. Meanwhile, wider groups of stakeholders are becoming more interested in companies’ tax postures with the implementation of FIN 48, the new accounting standard governing uncertain tax positions. As a result, companies must demonstrate more sophisticated key tax controls and work, more closely than ever, with their controller and CFO counterparts.”
The survey shows an interesting trend concerning the ratio of cash tax paid as a percentage of current tax provision. This ratio may give an indication of the level of tax reserves included in the current period tax provision. Mostly, the cash tax to current provision ratios are less than 100 percent, indicating that companies generally continue to build tax reserves. However, during the period of the study, the ratio has increased in all quartiles, indicating that the amount of additional reserves being recorded is decreasing.
Assuming fairly constant profits, cash tax paid during the year should be approximately equal to the current tax provision recorded during the same period. A lower ratio indicates that the current tax provision is higher than the cash tax paid during the year. This growth in the underlying ratio may be signifying that the companies included in the survey are slowing-down their build of tax reserves for current and previous tax planning strategies.
The Impact of Globalization
The survey shows that globalization has a significant impact on tax rates. The ETRs of “Multinational” companies are lower (three-year average 28.5 percent) than those of “Domestic” companies (three-year average 33.7 percent). The lower ETR of “multinational” companies reflects the fact that companies operating internationally have opportunities to undertake cross-border tax planning.
According to the survey, the ETRs of U.S.-based companies rose in 2005 compared to those of foreign-based companies, reflecting the impact of the American Jobs Creation Act (AJCA).
The AJCA provided American-based multinationals with a one-time opportunity to repatriate foreign earnings at a reduced rate of tax (generally 5.25 percent). Although this reduced the possible
Total Tax Contribution
Corporate income tax is only part of the total tax contribution made by chemical companies. Other business taxes include property, employment, environmental and industry taxes. This has implications for both internal management of all business taxes and transparency regarding reporting of all business taxes paid.
“Greater transparency over all taxes paid – the total tax contribution – will help disclose the impact of tax on the business and its stakeholders,” says Burak. “A current challenge for the tax professional is to identify the right balance when planning for taxes. On one side of the balance, taxes are a significant cost to the corporation and should be controlled and managed in the quest to create shareholder value and maximize earnings per share. On the other side, the amount of tax paid by large corporations is coming under increasing scrutiny and public debate. Tax benchmarking is one way of helping to judge this balance.”
Notes:
Four key tax ratios were examined in this study:
Effective tax rate (ETR): The tax provision as a percentage of income before tax taken from the face of the income statement. It gives a basic analysis of the impact of tax on results.
Current tax rate: The current tax provision as a percentage of income before tax where current tax is that element of the total tax charge that is not deferred. Comparing this ratio to the effective tax rate gives an indication of the impact of deferred tax.
Cash tax rate: The cash tax paid as a percentage of income before tax where cash tax paid is the amount of corporation tax paid during the period. It gives an indication of the true cost of tax to the company.
Cash tax paid as a percentage of current tax provision: This ratio may give an indication of the level of tax reserves included in the current period tax provision. Assuming fairly constant profits, cash tax paid during the year should be approximately equal to the current tax provision recorded during the same period. A lower ratio indicates that the current tax provision is higher than the cash tax paid during the year and, as a result, there may be an element of tax reserves within the current tax provision.
For more information on the PricewaterhouseCoopers Tax Benchmarking Survey for the Chemical Industry, visit: www.pwc.com/chemicals.
