No branch of financial data is too obscure for Calcbench to go full nerd, and today we demonstrate that commitment by returning to the world of tax data for a look at one of the newest tax disclosures out there.
Today we look at Global Intangible Low Tax Income, otherwise known as the GILTI tax.
GILTI was created by the U.S. tax reform law enacted at the end of 2017. It’s supposed to be a tax on certain types of foreign earnings, to dissuade U.S. companies from relocating their corporate headquarters (or other valuable intellectual property) to low-tax jurisdictions overseas.
Basically GILTI sets a minimum tax of 10.5 to 13.125 percent on the average foreign tax rate U.S. companies pay around the world. Spoiler: in the two years since its creation, GILTI hasn’t quite had that “keep your valuable asses here” effect lawmakers desired — but then, unintended consequences are nothing new to the U.S. tax code.
Calcbench isn’t interested in the perverse incentives stuff anyway. We just wanted to know how one can find GILTI tax data, so you can do whatever research is on your mind.
Here’s what we did.
First, GILTI turns up in a company’s tax reconciliation. That’s the breakdown every company provides explaining the difference between what it’s supposed to pay according to statutory corporate tax rates, and what it actually pays after various deductions and credits. So if you want to find GILTI payments, start there.
We used our Interactive Disclosure database, our Segments and Breakouts page, and our Raw XBRL Query tool to search those disclosures for “GILTI.” We found 27 companies that reported a reconciliation item related to GILTI. Table 1, below, shows the firms that reported an actual GILTI amount.
Here comes the tricky part. Firms can reconcile their tax disclosures in several ways. Some reconcile by dollar amount; others reconcile by tax rate. A few even reconcile both ways, which is nice.
But this does mean if you want a holistic look at all GILTI disclosures, you need to do some calculations. For example, Merck & Co. ($MRK) reported a GILTI tax payment of $336 million in 2019. Laboratory Corp. of America ($LH), meanwhile, reported that GILTI payments were 1.1 percent of total tax payments — so if you wanted to calculate the dollar amount, you’d need to look at what Lab Corp paid in taxes and do some math.
Financial analysts have another issue: U.S. Generally Accepted Accounting Principles don’t have a standard tag to apply to GILTI payments. That is, all firms report revenue using the same XBRL tag — and ditto for operating income, inventory, future lease payments, and so forth. You can easily find all companies’ disclosure of those items by searching for that tag.
GILTI has no such standard tag. Instead, each company still uses its own extension tag, and that can vary from one firm to the next. We found “GILTI tax,” “GILTI expense,” “GILTI net of foreign tax credits,” and lots of other examples.
In the fullness of time, GAAP might define a GILTI tag that applies to all companies. Today, analysts must still search disclosures and XBRL tags for “GILTI” or closely related terms.
That’s OK. Calcbench still has the data, and the database functionality to find those numbers — quickly and accurately.
Students of corporate tax rates might have seen a front-page article in the Wall Street Journal today exploring how the tax cuts of 2017 have changed effective tax rates for large public filers.
We certainly noticed the article — because it’s based on Calcbench data!Of course we’re flattered that the Journal would rely on us for their calculations. Calcbench has been tracking corporate tax disclosures, including effective tax rates and the adjustments that filers make to arrive at those numbers, for years. You can find them using the standardized metrics we offer on our Company-in-Detail and Multi-Company databases; or by searching text disclosures in our Interactive Disclosure page.
We recommend reading the full article, but the heart of the tale is told in these lines:
[Q1 2019] marked the third straight quarter [with median tax rates] below 20 percent, and is consistent with the goals and structure of the tax overhaul, which lowered the federal corporate rate to 21 percent from 35 percent. The law’s authors wanted to help U.S. multinationals compete in foreign markets and aid domestic companies with high tax burdens, while reducing the value of tax breaks and making it harder to achieve single-digit tax rates.
Much of the decline is coming because fewer firms are paying rates at the highest end, according to the Journal analysis.
Throughout 2018 and 2019, Calcbench has looked at specific examples of that trend. We found some firms with much higher effective rates during transitional periods in 2018; we found other firms with effective rates that plummeted; and still more firms whose effective rates have kinda sorta stayed flat. You can search our blog for “tax reform” and find a long list of posts on the subject.
One fine point: The WSJ article did include a line, “Companies typically don’t make public what they pay the Internal Revenue Service each tax year.”
Calcbench actually does track “Income Taxes Paid” from the Statement of Cash Flows. That is the amount of money a filer hands over to the IRS in a given fiscal year. It’s not the same as Provision for Income Taxes on the income statement, since that provision can include all sorts of deferred items or other adjustments.
But Calcbench has you covered for all things tax, no matter how specific you want to be. We got the data.
The consequences of tax reform in 2017 continue to be seen today, 18 months after Congress cut the corporate tax rate from 35 to 21 percent. Case in point: Casey’s General Stores ($CASY), which filed its latest annual report on June 28.
Casey reported broadly pleasing numbers: revenue growth up by 11.5 percent, cost of goods sold up by 11.7 percent, other operating expenses up by only 8.4 percent. Income before taxes was reported at $263.4 million, a 22.8 percent increase from 2018.
Then we get to the tax line item.
As you can see from Figure 1, below, Casey’s tax payments have bounced up and down over the last three years, and that has had an enormous effect on net income.
Taxes yo-yo’ed from a payment of $92.2 million in 2017; to a benefit of $103.5 million in 2018, the first full year of corporate tax reform; back to another payment of $59.5 million in 2019.
So yes, Casey’s is paying less in taxes from here forward thanks to tax reform — but all of its growth in net income came from that corporate tax cut going into effect in 2018.
Moreover, once we read the details via our Interactive Disclosure viewer, we find that most of that tax benefit ($98.2 million of the $103.5 million total) comes from a one-time revaluation of Casey’s deferred tax assets and liabilities. It’s not as if the firm received a $103.5 million rebate check in the mail, which then went to opening more general stories.
Fundamentally, Casey’s revenue is growing, but quite as fast as cost of goods sold, operating expenses, depreciation and amortization, or interest. Hence pretax income in 2019 ($263.4 million) is down 24.4 percent from where it was in 2016 ($348.7 million).
Only a generous accounting maneuver from tax reform let Casey’s hit last year’s net income out of the park. That maneuver is gone, and now Casey’s is struggling at bat.
Companies report tax payments, and companies make tax payments. Many times, those two things are not the same.
As part of our ongoing look at how the corporate tax cut of 2017 has been affecting net income, we recently tried to quantify just how much those two things are not the same. Studying that gap across several years helps to understand how much corporate tax numbers were distorted in 2017 itself (more on that presently), and whether corporate tax payments today are dramatically different from what companies paid before 2017.
We compared the difference in provision for income taxes (what a company plans to pay in taxes for a year) and income taxes paid (what the company actually did pay) for 400 firms in the S&P 500, 2014 through 2018. Then we expressed that difference as a ratio of actual taxes paid to the provision for income taxes.
For four of the five years we studied, the median firm in our population actually paid anywhere from 75 to 85 percent of what it had made provisions to pay. See Figure 1, below.
The exceptional year is 2017, where the ratio spiked to 98.4 percent. That is, almost all the taxes our median company prepared to pay, it actually did pay.
Why? Because when Congress enacted the corporate tax cut in 2017, companies suddenly had to pay large one-time “deemed repatriation taxes” on unremitted foreign earnings; or had to revalue deferred tax assets and liabilities; or do both. And those one-time tax moves had huge effect on companies’ tax payments and tax rates.
Calcbench wrote about this several times in the first half of 2018, as companies were reporting some sky-high effective tax rates in their 2017 annual reports. Our chart above is one aggregate glimpse of that effect.
Table 1, below, shows the tax payments-vs.-provisions for our 400 firms collectively. You’ll notice the percentage ratio here is different from what we have in our chart above. That’s because of outliers at both the top (they paid much more than their provisions) and the bottom (they paid much less), tugging at the average numbers.
That brings us to our final point for today: that individual companies have seen some large differences between tax provisions and taxes paid; and seen large changes in those numbers from one year to the next.
For example, in 2017 Gilead Sciences ($GILD) had provision for income taxes at $8.88 billion, but paid only $3.34 billion — a ratio of 37.6 percent. In 2018, however, Gilead had a tax provision of $2.34 billion but paid $3.2 billion — a ratio of 136.7 percent (because Gilead paid more than it had in its provisions).
We do this to amplify a point we made in our previous post about IBM ($IBM) — that drawing conclusions about how the corporate tax cut affects a firm is a complicated, company-specific exercise. You really need to delve into a company’s specific tax disclosures to get a sense of what is going on.
Yes, some companies are experiencing a “tax cut sugar high,” where all their growth in net income for 2018 can be attributed to paying less in taxes, rather than from better operating income. But some also paid so much in one-time taxes in 2017, that they were destined to pay less in 2018, and their tax payments now might be only marginally lower than what they paid in 2016 or prior.
So is that a sugar high now, or was it sour lemons last year? You can use Calcbench to find the answer for whatever companies you follow, but it’s a question that needs thoughtful research to find the right answer.
Avid readers of the Calcbench blog know that we’ve been watching corporate financial data closely here to understand a complicated, subtle question: How much has the sweeping corporate tax cut enacted at the end of 2017 been responsible for growth in net income?
Economists have pondered that question too, wondering whether the tax cut was a sugar high that goosed corporate earnings in 2018 — with the implication that after the sugar high wears off (say, in 2019), growth in net income might stall.
As companies file their annual reports for 2018, we can now start to answer that question. Somewhat to our chagrin, the answer is more complicated than we expected.
In theory, you would see the sugar high in a company where pretax earnings from operations remained flat or fell, but because the company paid so much less in taxes, net income would rise anyway. That is, the company’s net income didn’t increase because sales were growing or costs were kept in check; net income only grew because Uncle Sam decided to take less in taxes.
So if Washington had not enacted that tax cut in 2017, and the company paid 2018 taxes at the same effective rate as it did in 2017 — then net income might have held steady or fallen, but it wouldn’t have grown. That would be the sugar high.
Do we see that phenomenon at play when comparing 2018 to 2017 numbers? Yes, but with an asterisk. And that asterisk says a lot about how financial analysts need to look at a company’s numbers carefully if you want to get a correct read on its situation.
A good example of this situation is IBM ($IBM). We hopped over to our Data Query page and pulled up Big Blue’s earnings before taxes, income tax provision, and net income for both 2017 and 2018. The results were as follows in Figure 1, below.
As we can see, IBM’s pretax earnings actually drifted downward last year, but its income tax provision plummeted by more than $3 billion — an amount larger than $2.98 billion increase in net income.
Therefore, all of IBM’s growth in net income can be ascribed to the company paying less in taxes. And sure enough, when you look at IBM’s numbers on the Company-in-Detail page, they’re pretty mopey. Revenue, gross profit, and expenses for 2018 are all within 1 percent of 2017 numbers. That’s what stagnant growth looks like.
The tricky part, however, is in IBM’s effective tax rate. Yes, technically speaking, if IBM paid a 49.5 percent tax rate again in 2018 — that would have meant an income tax provision of $5.6 billion, and net income essentially unchanged at $5.73 billion.
Except, why was IBM’s effective tax rate that high in the first place? Because its effective tax rate in 2016 was only 4 percent (thank you again, Data Query page), and its effective tax rate in 2018 is 23.1 percent. Clearly IBM’s effective tax rate fluctuates quite a bit.
So you can’t assume that without the corporate tax cuts arrived in 2018, IBM would have faced the same higher effective tax rate as 2017, and therefore stalled on net income growth. The 2017 effective tax rate may have been an artificially high number itself.
How would you unravel that mystery? By studying IBM’s numbers on our Company-in-Detail page, and then tracing the tax provision line-item back to our Interactive Disclosure page, which lets you see the narrative explanation for that 49.49 percent.
Sure enough, when we trace the line-item back to the source, we find that IBM recorded a one-time charge of $5.5 billion in fourth-quarter 2017 — the famed “deemed repatriated earnings” tax that so many firms paid that quarter, as part of corporate tax reform. That $5.5 billion charge accounted for 48 points in that 49.49 percent.
IBM shows us the importance of tax management to a company’s bottom line — not really one-time sugar high this year, as much as an ongoing effort to minimize tax payments every year, which can leave net income growth divorced from operational reality.
We’ll keep looking at the sugar high phenomenon here, and try to draw broader conclusions about how real it may be.
Calcbench subscribers, meanwhile, can zigzag from our Data Query page, to the Company-in-Detail page, to the Interactive Disclosure page — all to connect the numbers companies report to the narrative they offer.
Then you can see how much those things do, or do not, align over time.
2018 was the first full year of life with dramatically lower corporate tax rates, and now we’re getting early data on exactly how much less companies expect to pay.
Surprising nobody — they are paying a lot less.
We examined 214 firms in the S&P 500 that have already filed their annual reports for 2018. First we pulled their reported earnings before taxes and provision for income taxes; and then compared those numbers to the same line items the firms reported in the prior three years.
Taken altogether, those firms saw their effective tax rates fall nearly in half, from 27.3 percent in 2017 to 14.2 percent in 2018. Their revenues rose briskly in 2018, while provisions for income taxes tumbled. See Figure 1, below.
We also have a year-by-year breakdown, for those who want to delve into the data. See Table 1, below.
For all you alternative history buffs: these firms had an average effective tax rate of 26.8 percent in 2015-2017, before Congress enacted its corporate tax cut at the end of 2017. If Congress had never enacted that tax cut, and we applied that same 26.8 percent rate to 2018’s pretax earnings of $832.9 billion — that would be an additional $104.4 billion in corporate tax payments.
Then again, if Corporate America were paying higher taxes, its collective net income would be lower, and stock prices would likely be lower too.
That’s how the data looks so far. More to come later this spring.
Another annual report, another glimpse into how much last year’s corporate tax cut is inflating net profits. Today’s example is J.M. Smucker & Co.
Smucker’s filed its latest annual report this week, and if you look at the top lines of the income statement the company seems like it’s in a bit of a jam. (Yep, we made that joke.) Annual revenue fell 0.48 percent compared to 2017, gross profit was essentially flat, and operating income rose a measly 0.45 percent.
Meanwhile, interest expenses rose and other income fell — all of it adding up to Smucker’s income before taxes falling 1.98 percent.
All that might lead you to conclude that Smucker’s is spread pretty thin. (Yep, we made that joke too.) But then we get to Smucker’s income tax disclosure, and suddenly all starts to turn around.
First, as we’ve seen elsewhere, Smucker’s had the chance to revalue its deferred tax assets and liabilities. That added more than $790 million back to the company’s coffers. Then the company had to pay an additional $26.1 million in the one-time deemed-repatriation tax. The net change: a: $765.8 million benefit.
Add that benefit into all the other taxes and deductions Smuckers is claiming, and the company ends up with a net refund of $477.6 million. Which means its net income after taxes actually increases to $1.34 billion. See Figure 1, below.
Presto. Smuckers reports net income up 126 percent compared to 2017, even though gross profit and operating profit stayed flat, and pre-tax income actually declined by nearly 2 percent.
That’s one way to get out of a sticky situation.
Deere & Co., maker of farm equipment with that little yellow and green deer logo, reported its latest quarterly results last Friday — and gave us yet another example of the see-saw numbers financial analysts will see this year as Corporate America reports the implications of tax reform.
The numbers were for Deere’s fiscal second quarter, ending on April 29. The earnings release was filled with the usual flowery language: $10.7 billion in revenue, up 29 percent from the prior-year period; net income of $1.21 billion, up 50 percent from one year ago. What’s not to love, right?
Then we noticed this disclosure: “Affecting results for the second quarter and first six months of 2018 were provisional adjustments to the provision for income taxes due to the enactment of U.S. tax reform.”
Ah. Let’s dig into that.
Deere reported second quarter results including net income of $1.21 billion. But net income for the first half of fiscal 2018 — which includes those rosy results from Q2 — is only $673 million. (See Fig. 1, below.) Which therefore means Deere reported a loss in its fiscal first quarter.
So searched Deere’s report for its fiscal first quarter, and sure enough, we found this:
Primarily as a result of those provisions of tax reform, the Company recorded a net provisional income tax expense of $965 million in the first quarter of 2018… The discrete tax expense related to the remeasurement of the Company’s net deferred tax assets to the new corporate income tax rate was $715 million and the deemed earnings repatriation tax was $262 million. The discrete tax expense was partially offset by a net benefit of $12 million, primarily related to the lower income tax rate on the first quarter of 2018 income.
And if you view Deere’s results on our Company-in-Detail page (be sure the setting is for quarterly results; not annual results which are the default), you can see that Deere increased its provision for income taxes from $129 million in first quarter 2017 to $1.06 billion in first-quarter 2018.
What’s more, Deere estimates that its provision for income taxes in the second quarter will be only $177 million — less than half the $371.9 million it paid in Q2 2017. (See Fig. 2, below; relevant line flagged in red.)
In other words, like many companies we’ve already noted previously on this blog, Deere had to swallow a large one-time adjustment in its first quarter 2018 thanks to tax reform, largely due to the revaluation of tax assets and paying a one-time repatriation tax. Now we’re seeing what the next numbers look like, after that one quarter’s worth of pain — and those numbers look pretty good.
Whether they’re good because of fundamentally strong growth, or good because the income statement is high on tax cuts, is another question. But Calcbench can always help you find the data to answer it.
Loyal readers of the Calcbench blog know that we follow corporate tax disclosures closely — you know, with tax reform being the biggest financial reporting issue of 2018 and all. We have a few research projects in the works related to tax disclosures, and you can expect much more coverage in months to come.
Meanwhile, for those just joining the Calcbench fan base, here’s a recap of our tax reform posts since the start of 2018.
Jan. 23: Tax Reform Disclosures: Five Easy Examples. Tax reform was signed into law on Dec. 22, 2017, and the disclosures started almost immediately. This post has examples from CHS Inc., Amcon Distributing, Nike, and others.
Feb. 8: Wha? One-Time Taxes and Effective Tax Rates. We soon noticed that thanks to the one-time deemed repatriation tax, companies were reporting effective rates higher than the statutory rate of 35 percent.
Feb. 15: Tax Reform Disclosures: Getting Started. As the disclosures started to pour in, we cooked up this primer about how to use Calcbench to find said disclosures, even if companies are tagging them in hard-to-find ways..
Feb. 20: Deferred Tax Assets and Tax Reform. Much of the change in corporate income, at least in this first year, is due to companies reassessing the value of deferred tax assets and liabilities. That’s such a complex subject we cooked up a Q&A on just that alone.
March 14: A Qwest for Insight on Effective Tax Rates. Thank you to Qwest for its 2017 filing, which gives us a fascinating example of how tax reform can goose a company’s 2017 operating income even as revenues decline.
April 11: Tax Reform Totals Among Big Filers. Our first actual study of 2017 tax reform disclosures! We studied the reconciliations of 95 large companies, which collectively expect to pay $40.3 billion less in taxes even as the average payment goes up.
April 26: Kraft-Heinz’s Crazy Tax Rate. Another thank you to Kraft-Heinz, first for its superior amount of detailed disclosure (more than 1,600 words); and also for showing us how a filer can report an effective tax rate of almost 100 negative percent.
May 4: Tax Reform: Who’s Up, Who’s Down, in Relative Terms. Another study, this time reviewing the disclosures of more than 120 firms that reconciled in percentage times— showing us that Kraft and its -98.7 percent effective rate ain’t even close to the craziest one out there.
If you have suggestions for what else we should examine, of course drop us a line at firstname.lastname@example.org. Otherwise, stay tuned here for more analysis from now until Dec. 31!
Last month Calcbench did a quick analysis of which large companies were reporting large swings in tax expense (either increases or decreases) as a result of tax reform, in absolute dollar terms.
Today we’re taking another look at big swings in tax expense in percentage terms — and through that lens, the numbers can be huge.
This time we looked at the 2017 filings of more than 120 large companies that reported some effect of tax reform. As we’ve noted previously, all companies must reconcile the effective tax rate they are really paying after adjustments, to the statutory rate. Some companies reconcile in dollar terms, others in percentages. For this exercise, we examined the filings of those 120 companies, which all reconciled by percentage, and searched for adjustments labeled as related to tax reform.
We ranked the 1o companies with the largest upward adjustments below.
The exact reasons for these adjustments may vary from company to company. To compile the list, we simply searched for adjustments tagged “Tax Act Impact,” “Impact of TCJA, percent,” or similar language like that. Within that broad heading, however, any number of reasons could drive the specific adjustments.
For example, AIG booked a $6.7 billion increase in tax expense primarily due to revaluations of its deferred tax assets and liabilities. That increase is larger than all of AIG’s $1.46 billion earnings before taxes — hence the percentage adjustment of 453 percent. (That’s simply the lion’s share of AIG’s effective rate. Include all the other usual adjustments, and its effective rate is actually 513.4 percent! We didn’t track all those items in this analysis, but you can find them on our Interactive Disclosure page.)
Other firms can report high percentage swings if, say, they pay a large amount in the one-time deemed repatriation of foreign earnings; and those earnings are a large portion of total earnings. We’ve seen other examples of the deemed repatriation leading to some whacky effective rates, too. But don’t worry, after this year, companies will resume making gobs of money and reporting eye-popping low tax rates.
As to the companies with the largest downward swings — that is, they are cutting their tax bill — they are…
Calcbench will continue to monitor interesting tax disclosures. Lord knows, we’ll see plenty of them this year.
Readers of the Calcbench blog know that we have been keeping one eye on tax disclosures this spring, as companies continue to report new and interesting implications of the tax reform law Congress enacted last year.
We have quite an interesting example today, from Kraft Heinz Co.
Kraft has a lot to say about tax reform: 1,656 words, plus four detailed charts. The company reconciles its statutory taxes to its effective tax rate in both dollar and percentage terms, so it wins points for being thorough. Still — we have much to unpack here.
Foremost, Kraft gets a huge benefit from reassessing the value of its deferred tax positions. As we noted in a previous post, deferred tax liabilities become more valuable as a result of tax reform (which lowered the tax rate on those assets from 35 to 21 percent). For Kraft, that reassessment led to a benefit of $7.5 billion. That benefit was offset by $312 million in new taxes for the one-time “deemed repatriation tax” on foreign earnings, plus another $125 million in other new taxes.
Still, that’s a net benefit of $7 billion. Not bad.
Also, given the repatriation of Kraft’s overseas earnings, the company “has reassessed our international investment assertions and no longer consider the historic earnings of our foreign subsidiaries as of December 30, 2017 to be indefinitely reinvested.” Those formerly reinvested foreign earnings totaled $1.2 billion; the decision to reclassify them as distributed profits cost Kraft $96 million in overseas taxes. (That amount is the lion’s share of the $125 million in new taxes we mentioned above.)
The reconciliation by percentage, however, is where things really start to get mind-bending.
That gigantic tax benefit of $7 billion is actually larger than all of Kraft’s 2017 income before taxes ($5.53 billion). So when you reconcile Kraft’s effective tax rate, the benefit of tax reform lowers the company’s rate by 127.3 percent — and the company’s overall effective tax rate is -98.7 percent. Take a look:
We’ve written several posts about unusual effective tax rates this year, as a result of one-time adjustments for repatriated foreign earnings and revalued deferred tax assets. Lots of companies are seeing their effective rates rise this year (before making gobs more money in future years), and some are seeing lower rates.
Kraft’s negative effective rate, however, takes the cake. Which seems fitting since, you know, it’s one of the largest food businesses in the world.
Rejoice, tax fanatics! We are getting more numbers on the total effect tax reform is having on Corporate America — real dollar amounts that show just how much less, or more, companies are paying.
Calcbench examined the 2017 filings of 95 large filers to see how tax reform will affect their taxes paid individually, and as a whole group. In total, these 95 large companies expect to pay $40.3 billion less in taxes thank to the Tax Cuts and Jobs Act, although a majority of them actually expect to pay an average of $528.2 million more.
We came to these numbers through the art of tax reconciliation — the breakdown companies provide between what the statutory tax rate would require them to pay, and the taxes they actually do pay. Tracking tax reconciliation is no easy feat, since some companies report the differences in dollar terms, others in percentages, and some in both. Most companies do (thankfully) offer their reconciliations in easy-to-read tables, although a few report them in (ugh) written paragraphs.
Bottom line: tallying up the effects of tax reform is tricky, but with our database superpowers, Calcbench did it anyway.
Calcbench examined the filings of 95 large companies (all S&P 500 filers) that report tax reconciliation in dollar amounts. We looked for any reconciliation item pertaining specifically to tax reform, and totaled up the numbers.
For example, Activision Blizzard reported 18 reconciliation items — but only one “US Tax Reform Act” item, which pushed up its expected taxes by $636 million. So that $636 million went into our tally. Boeing, meanwhile, reported an item called “Effective Income Tax Rate Reconciliation, Impact of Tax Reform Legislation” for a $1.05 billion adjustment upward. And Berkshire Hathaway reported a “Net Benefit From Enactment of TCJA” item that adjusted its taxes downward by $28.2 billion (the single largest downward adjustment we found).
Some filers reported no reconciliation items related to tax reform at all. We excluded them from our list.
The 10 filers with the largest upward increases are as follows:
The 10 filers with the largest downward cuts are these:
As we noted above, the group of 95 filers in total reported a downward adjustment of $40.3 billion. But when you look at filers individually, 51 of them expect to pay more in taxes this year — collectively, $29.94 billion more. That’s an average of $528.2 million.
On the other hand, 43 companies expect tax reform to cut their taxes this year by a collective $67.23 billion. That’s an average of $1.56 billion.
Lastly, it’s important to remember these are estimated changes that the company expects to see over 2018 and into the future. Final numbers might change in subsequent periods. Tax reform is still a work in progress for Corporate America and the tax filing industrial complex, so Calcbench will continue to keep an eye on the data as it comes in.
Last month we had a post about effective tax rates under tax reform, and the counterintuitive trend of higher effective tax rates thanks to this year’s one-time “deemed repatriation” tax. In many instances, those effective rates are well above the old statutory rate of 35 percent.
This week Qwest Corp. filed its annual report for 2017, and it provides a clear example of the opposite: how tax reform can push a company’s effective tax rate much lower. Let’s take a look.
First, Qwest is not subject to the deemed repatriation tax, because it has no overseas operations. So no trouble there.
Second, Qwest does have a pile of deferred tax liabilities on the balance sheet. As we noted in another post several weeks ago, deferred tax liabilities result from underpayment of taxes sometime in the company’s past. That means you owe those taxes sometime in the future. Tax reform, however, cut the statutory corporate tax rate from 35 to 21 percent — so those deferred tax liabilities become much less painful, recalculated against that lower future rate.
For Qwest, the reassessment of its deferred tax liabilities resulted in a tax benefit of $555 million. It also translates into a big cut in the company’s effective tax rate. When you include a few other small items, Qwest’s tax rate drops from 35 to 7.5 percent. You can see the reconciliation, below.
That $555 million tax benefit, meanwhile, gets reported on the income statement. Qwest’s tax payment dropped from $678 million in 2016 to only $134 million in 2017. That, in turn, goosed the company’s net income by 53 percent, to $1.66 billion — even though revenue at Qwest actually fell 6.6 percent, from $6.25 billion to $5.83 billion.
We’ll continue to keep an eye on tax reform in its many-splendored glory. This is just one example of the insight you can find in the data by using Calcbench.
In our continuing effort to give Calcbench subscribers more understanding about the data we are seeing related to tax reform, today we wanted to focus specifically on deferred tax assets and liabilities. Without further delay, then, here is a quick primer.
Q: So exactly what are deferred tax assets and liabilities, anyway?
A: They are the difference between what a company pays in taxes and what it actually owes. That can happen for any number of reasons. For example, the company might assume one tax position when it files its financial statement, and the IRS later determines that the company owes a different amount. Or a company might have net operating loss carryforwards, or tax credits, or other items that come into the picture.
The key point is that when a company pays more in taxes than it actually owes, that extra amount becomes a deferred tax asset: a tax payment the company can claim as a credit for whatever taxes it will owe in future years. In practical effect, the deferred tax asset will lower the company’s tax rate in future years.
Conversely, when a company pays less in taxes than it actually owes, that underpayment becomes a deferred tax liability: taxes that the company will need to pay eventually. A deferred tax liability increases the company’s tax rate in future years.
Many large companies have both deferred tax assets and liabilities. So the company can add them together to determine its “net” deferred tax position.
Q: Why is tax reform hitting them so forcefully?
A: Because of the cut in the statutory tax rate from 35 to 21 percent. A lower tax rate means your deferred tax assets are now less valuable — and, likewise, that deferred tax liabilities are less painful. Companies must remeasure the value of their “DTAs” against the new 21 percent rate, and that has led to the large write-downs we’ve seen in recent weeks. In some cases, large companies with DTAs piled on the books have had to write down billions of dollars.
Q: How are companies reporting these changes?
A: The write-downs on DTAs ultimately get reported on the income statement. That is why we’ve seen a parade of banks reporting big losses in fourth quarter 2017: they amassed tens of billions in deferred tax assets, mostly due to the losses they suffered during the financial crisis 10 years ago. Now they must take steep write-downs on those assets, which translate into losses far bigger than their income from normal operations.
Hence they are declaring losses thanks to tax cuts. It’s a bit counter-intuitive at first glance, but it makes sense when you think about it.
Other businesses that suffered big losses sometime in the past (BP, for example, after the 2010 oil spill; car companies, which were on life support circa 2009) are also reporting losses as well.
Q: Is this the “Big Bath” I read about sometimes?
A: Yes, in the sense that many companies are getting all their DTA write-downs done in one fell swoop. Once companies have that unpleasant business behind them, they get to enjoy those 21 percent tax rates forever more.
Q: How long will this continue?
A: Companies with a Dec. 31 fiscal year-end will file their annual statements within the next few months. (The S&P 500 will file within the next several weeks.) That will give us the lion’s share of what companies are going to disclose about DTAs and tax reform. Other companies with other fiscal year-end dates will file later, so we won’t get a complete picture until later into 2018.
Q: How can Calcbench help me monitor these items?
A: Funny you should ask. Deferred tax assets and liabilities are reported on the balance sheet as current assets (or liabilities) — but lots of other items can be part of current assets or liabilities, too.
The details about DTAs are buried in the footnote disclosures. So when researching an individual company, use our Interactive Disclosure page and look for “Schedule of Deferred Tax Assets and Liabilities” in the Footnote Table search box, middle of the page. (See Figure 1, below, circled in blue.)
You can also search for “Income Taxes” in the Choose Footnote Disclosure field, left side of the page. (Figure 1, circled in red.) That will display the schedule of deferred tax assets and liabilities, plus the company’s narrative disclosure about those items — including the possible effects of tax reform.
Q: Cool, but I want to look at DTAs in bulk, among many companies.
A: We got you. In that case, use our Multi-Company page. First, set the peer group you want to study. Then you can use the “Search XBRL Tags” field in the middle of the page to search any number of items related to deferred tax assets and liabilities. Start typing “deferred” and you’ll see the potential tags appear. Select the one you want, and Calcbench will pull up that data for all companies in the peer group you created.
Before we go further poring over corporate disclosures related to tax reform, we wanted to take a step back and give Calcbench subscribers a better sense of how to find all these disclosures.
The best place to start is with our Interactive Disclosures tool. There, you can easily find any company’s disclosures on income taxes. Just open the pull-down menu on the left side for Notes to Financial Statements, and you’ll see a choice for “Income Taxes.” Click on that, and the income tax disclosures appear.
(Aside: you’ll also see a choice to download our Guide to Income Tax Disclosures, which is a great primer on what Calcbench can do for you before you dive into the data.)
You can also try to use the XBRL Data Query Tool, which lets subscribers search for financial data based on how a company “tags” that piece of data. For example, you can search for numbers tagged as “revenue,” “operating income,” “severance costs” and all sorts of other terms. (We have a whole separate post about how to use the XBRL Query tool from several months ago.)
Alas, we do have one caveat with search tax disclosures via XBRL tags: since tax reform is so new, companies are using extension tags to describe their data related to tax reform. Extensions are tags companies create themselves, rather than using those dictated by the official taxonomy for U.S. Generally Accepted Accounting Principles.
So while most companies are using extension tags that are similar, those tags aren’t always identical.
How to Get Around That
Intrepid data nerds that we are here, Calcbench decided not to let the extension tags stop us. We used the XBRL Query tool and searched for “TaxCuts” mentioned in 2017 filings, assuming that any tag referencing tax cuts would use those actual words. (XBRL tags do not use spaces between words.)
Result: dozens of companies already citing the effects of tax reform so far, and we’ve just begun to receive 2017 reports from the S&P 500. So as filing season continues into the spring, eventually we’ll see thousands of filers mentioning tax reform in one way or another. See Figure 1, below.
Here’s where it gets interesting. Thanks to our Calcbench database superpowers, you can see how many companies use the same extension — and many do, because they’re describing the same concept. For example, look at Celgene in Fig. 2 below.
You can see in that highlighted line that it describes its new effective tax rate as “EffectiveIncomeTaxRateReconciliationTaxCutsandJobsActof2017Percent.” And that tag is a hyperlink; if you click on it, you can see all the other companies that have filed financial statements using that exact same extension. In this case, 43 companies used that tax a total of 117 times. (Fig. 3, below.)
Now we’re getting a sense of comparability; you know at least some of the companies that are disclosing an effective tax rate specifically for 2017, this first year of tax reform where effective rates might go a bit haywire. From there you can go back to the Interactive Disclosures page or the Company-in-Detail page to do further research, and see what those filers had to say. Yes, other filers might also report an effective rate using some other tag; we would need to do a lot more homework to develop a complete list. This, however, at least gets you started.
In the fullness of time Calcbench will have much more to say about tax reform and reconciliation items. But, as always, you can do your own exploring too!
Now that annual reports for 2017 are arriving in larger numbers, we’re starting to see more analysis of how tax reform will affect corporate taxes. One interesting item: thanks to the one-time tax on unrepatriated cash held overseas, some companies will see their effective tax rates for 2017 actually increase.
A prime example is Google, which filed its Form 10-K on Feb. 6. Google expects to pay $10.2 billion for that one-time tax. Combined with all the other taxes, credits, and deductions that Google usually claims, that will push its effective tax rate way up — from 19.3 percent in 2016 to 53.4 percent in 2017. See cool reconciliation chart, below.
Now, as the phrase “one-time transition tax” suggests, Google will pay this tax only one time. Presumably Google’s effective tax rate will return to “normal” in 2018, which seems to be somewhere around 16 to 21 percent in recent years. Indeed, its effective rate might even fall to lower levels, since the new statutory rate will be 21 percent and companies will work hard to go down from there. We’ve already set a calendar alert to check again in 12 months.
Lockheed Martin, which also filed its 10-K this week, is another example. The company reported an additional tax expense of $43 million on “deemed repatriated earnings” of $435 million. Combined with downward adjustments to some deferred tax assets Lockheed had on the books, that pushed its effective tax rate from 23.2 percent in 2016 to 63.4 percent this year.
Calculating what corporations “really pay” in taxes is notoriously difficult. All filers are required to reconcile their actual tax payments back to the statutory rate (35 percent through 2017, 21 percent from 2018 forward) — but some companies report dollar amounts, others use percentages, and some report both.
Calcbench did examine tax reconciliation among the S&P 500 last year, and found that average tax rate paid by the group over the last five years was 22.8 percent. Some had actual tax rates below zero, others rates considerably above the statutory 35 percent.
Bottom line: effective tax rates and tax reconciliation are tricky business. In this first year of tax reform, we’re likely to see some strange-looking numbers out there — but they only look strange. Use Calcbench to dig deeper, and you can follow the logic eventually.
**Psst…professional subscribers, yes, you. You can dive a level deeper! Here’s a link to learn more.
As corporations continue to file their first wave of financial statements after passage of tax reform in late December, we decided to take a peek at what disclosures they’re making about the law’s likely effects for them…
You get the idea: most companies talking about tax reform so far have been disclosing changes to the value of deferred tax assets or liabilities. We saw an early wave of similar disclosures at the end of December, as large banks disclosed short-term charges for the fourth quarter that sometimes reached into the billions.
Those are the short-term effects of tax reform. Over the long term, companies should, presumably, start reporting larger net income and lower effective tax rates, as the one-time adjustments of tax assets recede and the permanent lower rates take hold.
Calcbench subscribers can always monitor what companies disclose about tax reform by using the Interactive Disclosures page. Just set the company (or companies) you want to research, and enter “tax reform” or some similar term in the text search box on the right-hand side. Then feast on the results.
Financial reporting enthusiasts, take note: the world now has a new taxonomy of financial reporting terms for you to use!
Just before Christmas, the Financial Accounting Standards Board released its usual taxonomy of accounting terms according to U.S. Generally Accepted Accounting Principles. This is the taxonomy U.S. filers have used for years to “tag” the items in their financial statements that get filed with the SEC.
This year, however, FASB also debuted a new “SEC Reporting Taxonomy” — for other items that might be included in an SEC filing, but aren’t financial items that fit into GAAP.
For example, some of the SEC Reporting Taxonomy tags pertain to disclosures about oil and gas production that energy companies might be required to disclose. Other relate to financial schedules required by the SEC, and condensed consolidated financial information.
Now, for Calcbench subscribers who aren’t corporate accountants or lawyers obsessed with how financial information is reported, we know you may be thinking, “Umm, kinda cool, but what does this mean for me?”
Soon enough, it will mean more data available to you via Calcbench. The taxonomy and tagging talk is mostly insider stuff about how IT systems (including ours) can pull data from SEC filings and bring it to your screen in precise, speedy, accurate ways.
From your perspective as a consumer of all that data, this taxonomy news means you’ll just have more data — the data that will now be tagged according to the SEC Reporting Taxonomy — indexed, collated, and living comfortably in the Calcbench databases.
We should also note that overseas, the IFRS Foundation has proposed a taxonomy for companies that file statements using International Financial Reporting Standards. The SEC voted last year to require foreign private issuers who use IFRS to tag their SEC statements, so you’ll be able to see data from those filers, too.
One caveat: this won’t happen overnight. First, the Securities and Exchange Commission needs to approve these taxonomies, although that’s a formality that will happen in early 2018. Then companies will start submitting the SEC filings with the new tags; then Calcbench will start collecting that data. Ditto all that for the IFRS taxonomy, too.
But as the data starts arriving later in 2018, we’ll be passing it along to you.
While the tax bill is en route to the President’s desk for signature, Calcbench, the curious bunch we are, decided to do a little poking around.
The Wall Street Journal article cited here claims that, “U.S. corporations will pay a one-time tax of up to 15.5% on profits they have stockpiled abroad.” Does this mean tax on unremitted foreign earnings or does it mean tax on cash? We needed more information, so we turned to the tax bill itself. About halfway down page 1014, we found it:
We understood this to mean a tax on cash abroad. So here’s where it got fun; we turned to our multi-company viewer, searched the whole universe of firms for “overseas cash” (top 10 below), and then ran a trace on Microsoft.
The trace revealed $1.5B in foreign government bonds but also showed us other little gems like short term investments of almost $3.8B.
So what does this all mean? Will these overseas assets be subject to the 15.5% tax rate under the newly passed tax LAW? That could have implications for some of those heavy hitter firms from our search (Apple, Google, Johnson & Johnson, and more) but… we’ll leave that analysis up to you.
We encourage you to embrace your curiosity on the subject and as always, trust Calcbench to help you through it.
Earlier this month, we chose to analyze the tax reconciliation data for a subset of S&P500 firms. Anyone with a Calcbench subscription is invited to do something similar (or better). Here is a short summary of what we found.
Background and Data:
During the reporting of effective tax rates, companies provide more detailed information on the reconciling of these rates, or the taxes owed, versus the statutory corporate tax rate. At Calcbench, we examined the reconciling items on a systematic basis to observe behavior within this group of firms.
The exercise of systematically reconciling each item and putting them on an apples-to-apples basis is much easier said than done. An example of why this is a challenging exercise is that some firms reconcile to the dollar while others reconcile to the tax rate. In this case, the picture(s) below save us a thousand words.
So we took our data that was in percents and converted it into dollars so that we could try to do a closer comparison.
Once we started looking at the income tax footnotes, we found that there were 5 common reconciling items that impacted corporate taxes owed:
Certainly, there are other contributing factors, with many of them being firm specific. We chose not to examine these for purposes of this exercise. But we may return to firm specific factors at a later date.
Some high level observations from the 2016 annual filings are below:
Of the 428 firms in our sample that reported profits before tax in 2016, the 5 reconciling items in aggregate are below:
(Note that the State / Local deduction is added back when calculating the federal effective tax rate. We reported the results because the data is significant)
The top 10 foreign reconciling items were taken by the following firms:
The top 10 share R&D reconciling items were taken by the following firms:
The top 10 manufacturing reconciling items were taken by the following firms:
Top 10 share based compensation reconciling items were taken by the following firms:
The top 10 State/ Local reconciling items were taken by the following firms:
The idea behind the data is rather simple. Get data and use it.
Our analysis, done as usual with our friends at Radical Compliance, found that the average taxes paid by the group in those five years equalled a rate of 22.8 percent; roughly one-third lower than the 35 percent statutory rate often cited in policy debates.
You can download our report, “We Are the 22.8 Percent: Analysis of Taxes Paid Among the S&P 500,” on the Calcbench Research page.
We calculated those rates by dividing a company’s income taxes paid into earnings before taxes, both of which are readily available on our Company-in-Detail or Data Query pages. Our study examined those numbers for all S&P 500 companies that made a profit in the five years of 2012-2016. The average rates fluctuated within a range of 20.32 percent (2016) to 24.58 percent (2014).
We also calculated the implied tax deficit—the difference between what large U.S. companies did actually pay in the last five years, versus what they would pay at the full 35 percent statutory rate. That implied tax deficit was $795.4 billion, an average of $159.1 billion annually over the last five years.
Other key findings of the study include:
How does all this square with the Trump Administration proposals for tax reform? Funny you should ask. Last week the administration proposed cutting the corporate tax rate from 35 to 20 percent, ostensibly to make the United States more competitive with lower-tax nations around the world.
For comparison purposes, however, if this S&P 500 group were its own country with a statutory tax rate of 22.8 percent, they would place in the middle of tax rates among the 35 countries in the Organization for Economic Cooperation and Development. (The United States’ statutory 35 percent rate does place it highest among the OECD.)
Granted, companies can only achieve those lower tax rates thanks to aggressive pursuit of tax deductions, exemptions, and other financial maneuvers—and the art of claiming all those items does carry a cost in manpower and consulting. The question is whether those tax management costs, plus the lower tax rates companies pay, equal what companies would pay at the full 35 percent statutory rate without any tax management, deductions, or other exemptions.
If Congress simply cuts statutory tax rates without reforming credits, deductions, and other tax management techniques, businesses will pay even less in taxes, with unclear consequences for the federal deficit. If Congress cuts statutory rates to 20 or 25 percent, and does also eliminate various deductions and tax management techniques, that would simplify the tax code for corporations without any adverse risk of higher deficits.
You can download and read our full paper on the Calcbench Research page. We also look at the spread of tax rates among the S&P 500 in 2016 (a lot of companies paid much less than 22.8 percent), and list the firms with lowest tax rates overall. We also list the 10 companies with the most earnings before taxes, and the tax rate each one paid.
The GAAP taxonomy, updated every year, is a crucial part of clear financial reporting and smarter, more automated financial analysis. The terms define line items such as revenue, net income, goodwill, PPE, and so forth; and those terms are then connected to the XBRL data filing language companies use to submit financial reports to the SEC.
Software can then read those XBRL-tagged financial reports and present financial data with more speed and precision. All the super-cool stuff you see in Calcbench databases? It traces back a clear taxonomy of GAAP terms.
The proposed taxonomy is out for public comment until Oct. 31, 2017. So if participating in the financial reporting process is your thing, visit the FASB website and speak up. (FASB also plans an explanatory webcast on Oct. 3 to walk through the proposed taxonomy.)
So there we were, nosing around the 2016 results of the S&P 500. We happened upon the results of Hess Corp., and noticed something unusual: Hess reported an operating loss last year, but also paid income taxes.
Wait, we said—can that be right? Why would a company pay taxes for a year in which it lost money? And how often does this happen, anyway?
Thankfully, Calcbench databases can answer those questions. Let’s show you how.
First we need to identify how many S&P 500 companies did report losses in 2016, but also paid taxes. That requires some straightforward work on our Multi-Company page. The key is to narrow the field through our Choose Companies feature. Note the dialogue box in Figure 1, below.
We selected the S&P 500 as our first target, a standard peer group available in the middle column. Then we moved to the left-side column to narrow the field. We used the Screen/Filter tab, then chose Standardized Metric. That gave us the option to search standard terms on the Income Statement, and we selected Operating Income. Then we set our parameter for only those companies whose operating income was less than zero—that is, they had a loss last year.
Now peek at the right-side column. You can see our original list of the S&P 500 has been whittled down to 46. Then hit “Done choosing companies.” That brings you back to the Multi-Company page, in Figure 2 below.
Next, we need to find which companies within those 46 also paid taxes last year. That’s easy. Go to the Search Standardized Metrics text box (circled in blue, above), and start typing “Income tax provision.” You’ll see that choice appear, and click on that one. A new column will appear on the results on the right-hand side. Then we can sort results by that column, largest to smallest—which gives us the 19 companies in the S&P 500 that reported both operating losses and income taxes paid last year. See Figure 3, below. Note the results on the right-hand side, now different from Figure 2.
The results we get on the Multi-Company page only give us tabular information. We know which companies fit the profile, and how much they reported in operating losses and provisions for income taxes. So why would they do this?
To find out that answer, we need to use the world-famous Calcbench Trace feature.
Move your mouse over any result in that Income Taxes column. You’ll see the Trace feature activate with a small word that says—wait for it—“trace.” That will bring you to a result like what we see in Figure 4, below.
In this example, we traced the $2.22 billion Hess claimed as an income tax expense. The trace shows us exactly where that number appears on the income statement (high-lighted in blue), and further below (circled in red) you can see a “Read Full Disclosure” option. Click on that, and you will be taken to the exact footnote disclosure that explains why Hess reported the $2.22 billion in taxes. (Figure 5, below.)
Hess’s explanation is rather lengthy. We won’t go into it here. Companies might pay taxes even amid operating losses for a variety of reasons: a foreign subsidiary that requires payment, some complex business strategy, and the like.
Whatever that specific reason may be, you can use the same technique to find the disclosures of the other 19 companies that paid taxes and reported operating losses last year. If we found a company that didn’t have a “Read Full Disclosure” option when we traced the number, we could always dig into the truth by using the Interactive Disclosure database instead, searching for Income Taxes in the “Choose Disclosure Type” menu on the left-hand side.
Calcbench subscribers can use the same principles for all sorts of sophisticated searches. Start by using the Choose Companies box to identify a broad range of companies you want to study, and then work on the Multi-Company page to refine that first group of peers into a smaller, more precise list. You can sort that smaller list however you like, and use the Trace feature or the Interactive Disclosure page to find precise reasons why a company reported the numbers it did.
Financial reporting enthusiasts, it’s that time of year again. The Financial Accounting Standards Board has published its proposed 2017 taxonomy for U.S. Generally Accepted Accounting Principles.
The taxonomy is available for public comment until Oct. 31. After that, FASB will prepare a final version and present it to the Securities and Exchange Commission for final approval in early 2017. That 2017 taxonomy will be what we all use to file financial statements next spring, plus the accompanying XBRL exhibits that tag all the data so it can indexed and presented easily (by Calcbench or other, less cool data research firms).
So if you have an interest in the accurate filing of financial data, be sure to review the taxonomy and give a few comments.
According to a brief summary provided by FASB, “stability continues as a critical consideration with simplification efforts focused on structural design changes and topical project reviews.” That is a polite way of saying changes to the taxonomy will be relatively few, especially compared to several years ago. Topics that will see changes in 2017 include revenue recognition, derivatives, extinguishment of liabilities, credit losses, and cash flows.
Attention analysts! 10-K season is in full swing. If you’re looking to get some serious insight into the income taxes for the companies you cover, look no further, we’re here for you.
Take a look at our new guide to analyzing tax data and disclosures using Calcbench. Read and compare tax disclosures online easier than ever before. Then get your hands dirty with detailed data from the tax provision, deferred assets and liabilities, unrecognized benefits, and more.
Best part is, thanks to the magic of XBRL, new data comes in within minutes after the 10-K leaves the CFOs desk.
Today, the Wall Street Journal printed a great overview by Theo Francis (with a little data help from Calcbench) about unrecognized tax benefits: what they are, who is taking advantage of them, and what does it all mean.
Now, what if you’d like to learn more? Easiest way is to jump right into the tax footnotes of some of these companies using our Footnote Query. You can select a company, an industry group, or a major index like the S&P500. Then choose the Income Taxes disclosure, and start reading:
What if you want to narrow your search even more? Type the word ‘unrecognized’ in the “Footnote Table or schedule type” box and you’ll get a list of standard disclosure tables pertaining to unrecognized tax, AND the number of companies in your group have each of these tables! Choose which one you want to look at and go…
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