Eric J. Weigel 1

Effective Corporate Tax Rates

A High Level Graphical Exposition

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Eric J. Weigel 2

Motivation• In the last few months there has been a lot of talk about “tax-

inversions”. A tax inversion occurs when a company domiciled in a higher tax country merges with a (usually smaller) company based in a lower tax locale. The newly formed company then elects to be domiciled in the low tax location thus resulting in significant tax savings• A couple of days ago the US Treasury proposed a new set of rules

designed to limit the ease and tax-arbitrage of such inversions• We are interested in finding out what the median effective tax rate

is across a range of tax domiciles and how it has changed over time• A wide spread in effective corporate tax rates across countries

creates fertile ground for future tax inversions

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Eric J. Weigel 3

Sample and Methodology• Global universe of common stock securities with a market capitalization of $200M or

greater as of March 31, 2014 (roughly 14,000 securities) domiciled in over 50 countries

• Annual financial statement information sourced from Factset.

• 2014 and 2015 figures are based on sell-side analyst forecasts

• All growth rates, measures of profitability and effective tax rates exclude companies with negative earnings

• Medians as used as measures of central tendency to remove the effects of outliers

• Mean Absolute Deviations (MAD) are mostly used as measures of dispersion but we also examine the interquartile range (Q3-Q1)

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Eric J. Weigel 4

Research Approach• In our study of global company profitability we decompose ROE

into its various components – one of these components is Tax Burden

• We measure Tax Burden from corporate financial statements rather than filed tax forms

• The Effective Tax Rate is measured as (1 – Tax Burden)

• Medians are used as a measure of central tendency. Robust dispersion estimators such as Median Absolute Deviation (MAD) and the Interquartile Range (IQR) are similarly employed

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The ROE Decomposition

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Where,

Tax Burden = Net Income / Pretax IncomeInterest Burden = Pretax Income / Earnings Before Interest and TaxesOperating Margin = Earnings Before Interest and Taxes / SalesAsset Turnover = Sales / AssetsLeverage = Assets / Equity

Eric J. Weigel 6

Effective Tax RateResearch Results

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Eric J. Weigel 7

Effective Tax Rates in 2013By Country

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IRELA

ND

TURK

EY

SINGAPO

RE

CHIN

A

TAIWAN

POLA

ND

THAIL

AND

NETH

ERLANDS

SWIT

ZERLAND

CHIL

E

NORW

AY

UNIT

ED K

INGDOM

BELG

IUM

FINLA

ND

RUSS

IA

SWED

EN

MALA

YSIA

HONG K

ONG

SOUTH

KOREA

DEN

MARK

SPAIN

INDONESI

A

GREECE

PHIL

IPPIN

ES

CANAD

A

NEW

ZEALA

ND

AUST

RIA

MEXIC

O

PORTU

GAL

BRAZIL

AUST

RALIA

SOUTH

AFR

ICA

INDIA

GERM

ANY

PERU

PAKIS

TAN

UNIT

ED STATES

ISRAEL

FRAN

CE

COLO

MBIA

ARGEN

TINA

JAPAN

ITALY

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Effective Corporate Tax Rates: 2013

MEDIAN MAD

Lower tax locales are geographi

cally diverse

US tax rates are relatively

high

Eric J. Weigel 8

Effective Tax Changes2013 Compared to 2003 Medians

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ISRAEL

GREECE

POLA

ND

FINLA

ND

GERM

ANY

MEXIC

O

NETH

ERLANDS

UNIT

ED K

INGDOM

NORW

AY

AUST

RIA

CHIN

A

IRELA

ND

SWED

EN

NEW

ZEALA

ND

JAPAN

INDONESI

A

SOUTH

KOREA

DEN

MARK

RUSS

IA

CANAD

A

MALA

YSIA

PORTU

GAL

SPAIN

ITALY

TURK

EY

SOUTH

AFR

ICA

SWIT

ZERLAND

FRAN

CE

COLO

MBIA

PAKIS

TAN

AUST

RALIA

UNIT

ED STATES

PERU

PHIL

IPPIN

ES

THAIL

AND

INDIA

BRAZIL

SINGAPO

RE

CHIL

E

TAIWAN

HONG K

ONG

BELG

IUM

ARGEN

TINA

-15%

-10%

-5%

0%

5%

10%

15%

Effective Corporate Tax Rates: Changes in Median2013 compared to 2003

Countries seem to be competing on lower-ing corpo-rate tax

rates

Minor drop in median

tax rates in the US

Eric J. Weigel 9

Global Perspective Over Time

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1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 201510%

15%

20%

25%

30%

35%

40%

45%

50%

55%

60%

Effective Median Corporate Tax Rates

JAPAN US UK GERMANY CHINA

US rates have slowly drifted down over time but have failed to match tax cuts in most other parts of the world

Eric J. Weigel 10

The US Situation

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1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 201510%

15%

20%

25%

30%

35%

40%

45%

Corporate Tax Rate: US

MEDIAN Q3 Q1

The median seems pretty steady over time but there has been a significant drop in the effective tax rate for the bottom 25% of companies paying taxes

Eric J. Weigel 11

A Look At Sector Tax Effective Rates

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Elect

ronic

Tec

hnolog

y

Hea

lth T

echnol

ogy

Non

-Ener

gy M

iner

als

Con

sum

er D

urabl

es

Finan

ce

Proce

ss Indu

stries

Technol

ogy Ser

vice

s

Produ

cer M

anufa

cturi

ng

Con

sum

er N

on-D

urabl

es

Indu

strial

Ser

vice

s

Utilities

Con

sum

er S

ervi

ces

Dis

trib

ution

Ser

vice

s

Energy

Min

eral

s

Com

mer

cial

Ser

vice

s

Transp

orta

tion

Ret

ail T

rade

Hea

lth S

ervi

ces

Com

munic

atio

ns0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Effective US Corporate Tax Rates: 2013

MEDIAN QRANGEThere are greater intra-sector differences as compared to across sector differences in effective tax rates

Eric J. Weigel 12

Summary Findings• US domiciled companies have median effective tax rates on the higher end of the global

spectrum

• The median effective tax rate for US companies has drifted slightly lower over the last 25 years, but has lagged similar tax cuts in other economic areas

• Japanese-based companies suffer from higher tax rates compared to the US, but the gap has been narrowing in recent years

• In contrast, the gap between the higher tax rates in the US and popular “tax inversion” locales such as Ireland, the UK and Switzerland has been expanding

• As long as the gap between high and low tax locales is significant (and especially if it is growing like in recent years), “tax inversions” will persist

• Short-term fixes or penalties are unlikely to fully remove the incentives for corporate management teams to continue to search for “tax-arbitrage” opportunities

• In an environment of already record high profit margins, the search for tax-arbitrage may be one of the remaining levers available to companies facing subdued rates of top-line growth

• Only true tax reform can hope to offset the current significant tax rate differentials, but a likely competitive response should be expected

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Further Information• This high-level research is part of a larger study undertaken by

Global Focus Capital on the profitability of global companies

• Research to be released soon specifically breaks down Return on Equity (ROE) by its various key components

• Effective tax rates are derived in this study from corporate financial statements and may as such differ from formal tax records and may also be significantly influenced by local accounting treatment

• For further information please contact Eric J. Weigel at 617-529-2913

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Eric J. Weigel 14

Appendix

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Eric J. Weigel 15

US SECTORS

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US SECTORS

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US SECTORS

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US SECTORS

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US SECTORS

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US SECTORS

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US SECTORS

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US SECTORS

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US SECTORS

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US SECTORS

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