|Effective tax rates are
becoming less useful as a benchmarking indicator
The recent tsunamis of tax complexity, including enactment
of the US Tax Cuts and Jobs Act of 2017 (TCJA), subjective
anti-abuse rules, transfer pricing disputes and an increase in
the backlog of competent authority requests have effectively
marginalised this ETR comparability tool.
The recent wave of complexity has forced most investors to
avoid reasonable interpretations of a public company's tax
footnote, thereby focusing more on non-tax operational measures
which are, by nature, easier to understand and rationalise.
The TCJA has introduced additional layers of complexity,
with code names of GILTI (global low-taxed intangible income),
BEAT (base erosion and anti-abuse tax), and FDII (foreign
derived intangible income). These new provisions have thousands
of pending pages of additional guidance that will attempt to
further clarify the new law. The extent to which a US
headquartered public company's tax posture could be reasonably
interpreted was waning up until 2018, but the TCJA further
obliterates any realistic insight.
General anti-avoidance rules (GAARs), coupled with
anti-abuse rules, transfer pricing complexities and
inefficiencies in tax dispute resolutions, have further
escalated the level of incomprehension of a company's ETR,
notwithstanding comparability to other peer companies.
Tax accounting has also been left behind in this complexity.
US generally accepted accounting principles (GAAP) are very
prescriptive for tax reporting, although clinging to former
concepts and principles that defy reasoned conclusions. An ETR
footnote presentation is somewhat vague and obtuse, as it
cannot begin to explain the complexity for all elements that
differ from a company's statutory tax rate. Other forms of
accounting principles will also be stripped by new tax
standards that no longer fit within prescribed rules of
reporting. US GAAP and other principles will strive to catch
up, although new complexities and interpretations will continue
to frustrate those efforts in a no-win situation.
In summarising the above obstacles for understanding a
company's ETR, are there better ways to promote comparability,
notwithstanding the tax complexities that defy a reporting
One possible starting point for a global ETR would be the
statutory rates multiplied by pre-tax book incomes in all
jurisdictions. This starting point would illustrate the basic
differences of jurisdictions in which a company conducts
business. Naturally, this would be different for every company
each year, although the major components of changes leading to
the global ETR can then be enumerated.
An alternative form of reporting would use cash taxes as a
supplement to the current tax footnote, exclusive of interest,
penalties, audits and non-recurring items. Notwithstanding
timing issues of cash tax payments, this trend may be useful in
understanding the relationship between business operations and
taxes more simply.
It is a steep uphill climb to understand a company's ETR to
form a comparison with peer companies. The simple task of
assembling an ETR, without further explanation, is gone. As a
result, ETR benchmarking is not a value-add exercise. The
complexity of tax reporting, coupled with recent changes in
international tax principles, have led to the erosion of an ETR
as a benchmark.
|Keith Brockman is the VP
Global Tax at Manitowoc Foodservice. His previous role
was international tax director at Mars. He is also a
lecturer, frequent speaker and the author of the
Strategizing Multinational Tax Risks blog. In his regular
ITR column he provides a practical analysis of
some of the more challenging recent developments for
corporate taxpayers, looking at how in-house
professionals can mitigate new risks and identify
effective solutions in an evolving environment.