May 2013

April 2013

In this study, using the firms comprising the Dow Jones Industrial Average, we examine the factors that cause effective tax rates to fall either below or above statutory tax rates and current tax rates to fall either below or above effective rates. Contributing to lower rates are the effects of foreign tax rates different from the U.S., tax credits, and adjustments related to prior-year tax accruals, though in some cases, foreign rates are higher than in the U.S. State and local income taxes and interest and penalties had the effect of raising effective tax rates.

Across the 2009 – 2011 sample period we saw an increase in the median effective tax rate, rising to 27.2% in 2011 from 26.7% in 2010 and 24.1% in 2009. It was driven higher primarily by a decline in the tax-rate reduction attributable to lower non-U.S. tax rates. Not all sample companies enjoyed effective tax rates that were below the 35% statutory rate. For example, due to higher tax rates in non-U.S. jurisdictions, the integrated oil companies, Chevron and Exxon-Mobil, had effective tax rates that exceeded 40%. Companies with the majority of their operations in the U.S. reported effective tax rates that were at or above 35%. Firms in this group include Home Depot, United Health Group and Walt Disney Co. Several companies enjoyed effective tax rates below 20%, including Merck and Microsoft, among others, and some profitable companies even reported negative effective tax rates, such as AT&T, Bank of America, Caterpillar and General Electric.

Current tax rates, or taxes that are currently due and payable as a percentage of income before tax, tend to run below effective tax rates. In 2011, the median current tax rate was 24.5%, driven lower than the effective tax rate by deferred taxes arising from the use of accelerated depreciation for income tax purposes. Like the effective tax rate, however, the current tax rate increased across the sample period, rising 24.5% in 2011 from 21.4% in 2010 and 20.7% in 2009. Using the current tax rate as a guide, in 2011 large U.S. multinationals are paying in taxes approximately 25% of income before tax. Many of these large companies have actively sought to reduce their income tax liabilities such that significant components of their profits are earned outside the U.S. where tax rates are lower. As a result, many of the taxes being paid by these companies are going to non-U.S. governments. As tax policy is debated in this country, policy makers would be well advised to take note of the findings of this study. In particular, statutory rates approaching something closer to 25% could be successful in moving back to the U.S. much of the income taxes being paid by companies outside the U.S.

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January 2013

A noncontrolling interest, also known as a minority interest, exists when a subsidiary is not wholly owned by the parent company. While a careful designation of income and equity attributable to noncontrolling interests is made on the income statement and balance sheet respectively, under GAAP a similar attribution is not made on the statement of cash flows. As such, investors, analysts and other users of financial statements may be unaware that operating cash flow includes amounts attributable to both controlling and noncontrolling interests, potentially leading to over-estimates of cash available for dividends to controlling interests.

In this study, for a sample of firms with significant noncontrollng interests, we examine the amount and placement of distributions to noncontrolling interests on the statement of cash flows. We find that while distribution amounts are significant, averaging 79.2% of income attributable to noncontrolling interests, there is no reporting consistency for the distributions being made. In some instances, distributions are not even disclosed on the statement of cash flows. Recommendations for change to the reporting of distributions to noncontrolling interests on the statement of cash flows are made to make their placement more consistent with the manner in which noncontrolling interest in income is presently reported on the income statement.

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