FCX Freeport McMoRan Inc

By Theo Francis and Richard Rubin 

The U.S. tax overhaul has lowered tax rates for many companies, and many others that were already toward the bottom of the scale have been able to stay there so far, a Wall Street Journal analysis shows.

The lower rates follow tax-law changes Congress passed at the end of 2017. Since then, the Journal analysis shows, the median effective global tax rate for S&P 500 companies declined to 19.8% in the first quarter of 2019 from 25.5% two years earlier.

That marked the third straight quarter below 20% and is consistent with the goals and structure of the tax overhaul, which lowered the federal corporate rate to 21% from 35%. 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. Just 28 companies, including mining giant Freeport-McMoRan Inc. and Chevron Corp., reported a global tax rate above 32% in the first quarter, down from 143 before the overhaul.

The Tax Cuts and Jobs Act of 2017 limited deductions and introduced new minimum taxes on overseas income, though some of the bite of those changes was delayed to beyond 2020. Thus, 119 S&P companies including Adobe Inc. and General Motors Co. paid global tax rates below 12% in the first quarter. That is up from 93 companies before the overhaul.

Companies typically don't make public what they pay the Internal Revenue Service each tax year. But public companies do disclose their effective tax rates: the measure of taxes incurred under generally accepted accounting principles as a share of pretax income.

Those rates reflect global results and include foreign and state taxes, not just what companies owe the U.S. Treasury Department. Quarterly results can bounce around, swayed by one-time events. For many big companies, however, U.S. federal taxes are the most important component.

A quarter of S&P 500 companies reported effective global tax rates below 21% in each of the past four quarters, the Journal analysis found. Companies can wind up paying less than the statutory rate, even on U.S. income, thanks to a variety of breaks that lower their tax bills, including a deduction for exports and credits for corporate research.

The Journal's analysis, using figures from financial-data firm Calcbench Inc., omits tax rates reported for the last three months of 2017 and the first three months of 2018 -- quarters in which many companies booked big, one-time changes driven by the tax law. Results were similar when real-estate companies, which tend to report very low tax rates, were omitted. (See methodology note for more detail.)

A separate analysis, from S&P Dow Jones Indices, found similar shifts in income-tax rates for S&P 500 companies since the tax law's enactment.

Outside the U.S., companies pay local tax rates that can be much lower than what the IRS charges. In some cases, those low foreign rates will trigger a new residual U.S. tax. The Global Intangible Low-Taxed Income, or GILTI, provision is intended to ensure companies pay at least 10.5% on most foreign income. Those factors create variation among companies, as do periodic settlements with tax authorities, the mix of countries where profits are booked and other anomalies.

The decline in the median effective tax rate points to what could be an even more significant shift: The range of tax rates reported by most big companies has contracted following the new law.

In a broad sense, compressing corporate tax rates was one of the goals of the overhaul. Those paying the most, including heavily domestic companies such as retailers and utilities, could expect to pay less, while those with the lowest rates, often tech and pharmaceutical companies that some say engaged in offshore tax-avoidance maneuvers, could expect to pay more because of GILTI.

Take, for example, Zoetis Inc., a maker of veterinary drugs. Its tax rate fell to 18% in the first quarter from 28% two years earlier. While much of that decline stemmed from the reduction in the corporate tax rate, changes outside the U.S. and one-time accounting adjustments also had an effect.

Zoetis said its world-wide tax rate has declined by 7 to 8 percentage points as a result of the tax overhaul. The company said the global-minimum GILTI tax is expected to increase its rate in 2019 by about 1 percentage point. That tax is just starting to affect the company in 2019 because of when its foreign subsidiaries begin their fiscal year.

Lower rates mean less tax revenue for the government. So far this fiscal year, the federal government has collected $164 billion in corporate taxes, up 2% from the prior year as the economy continues growing, but 26% below where they were in the comparable period before the tax law took effect.

Not all companies posted lower tax rates. About a quarter of the S&P 500 reported rates similar to those they disclosed before the overhaul, and about 17% said that their rates rose by 5 percentage points or more in recent quarters.

One company with consistent increases was Hanesbrands Inc. The company reported a tax rate averaging 14% over the four quarters in the Journal analysis following the tax law's enactment, up from an average of just under 6% before the tax-law change.

The new global minimum tax, together with another provision, added about 2.3 percentage points to Hanesbrands's tax rate in 2018. Other breaks and adjustments mostly offset each other for the year.

The company confirmed its global tax rate rose with the tax legislation. About 60,000 of its 68,000 employees work in facilities outside the U.S. "By virtue of owning and operating our own global supply chain, our tax rate is lower than the U.S. statutory rate," a Hanesbrands spokesman said. "That is one of the benefits of our business model to own and operate the majority of our global supply chain."

Policy makers added several provisions to the tax code, including the GILTI global minimum tax, intended to make it harder for companies to book profits at ultralow tax rates in foreign jurisdictions without paying U.S. taxes on top of that.

Some companies with very low tax rates have managed to maintain them for now. Adobe said its fiscal year ended in November, so the GILTI tax and other provisions of the new law didn't take effect until this fiscal year.

Semiconductor maker Xilinx Inc. reported quarterly tax rates of about 6% to 13% before the new law, compared with 6% to 11% after the overhaul.

In both periods, the chip designer -- with products used in 5G networking equipment -- benefited from the bulk of its pretax income being attributed to foreign markets: 82% in its most recent year.

Xilinx, which has a regional headquarters and manufacturing facility in Singapore, has received "Pioneer Status" from the government there and benefits from a preferential zero tax rate through its 2021 fiscal year.

The company said its obligations under the GILTI tax on foreign earnings offset a portion of the benefit from its low foreign rates. Even so, the company's global tax rate was below 11% in each of the past four quarters and below 7% in two of them.

A Xilinx spokesman declined to comment beyond disclosures in its securities filings.

WSJ Methodology

The Journal analyzed quarterly disclosures for companies in the S&P 500 index. It calculated tax rates by dividing the provision for income taxes by pretax income, as provided by financial-data firm Calcbench.

Quarterly periods were aligned so the quarter including the date of the tax law's enactment, Dec. 22, 2017, was treated as the fourth quarter of 2018 for all companies, with other quarters renamed accordingly. Results for the fourth quarter of 2017 and the first quarter of 2018 were generally omitted from the analysis because tax rates for many companies were dramatically skewed by one-time accounting effects from adopting provisions of the law.

Individual companies' tax rates can swing dramatically from quarter to quarter for a variety of reasons, including settlements with tax authorities and the effects of mergers and acquisitions. The analysis used median tax rates to minimize distortion caused by outliers. In addition, because of the volatility, the analysis of tax-rate convergence omitted the 10% of companies with the highest tax rates and the 10% with the lowest rates in each period.

Write to Theo Francis at theo.francis@wsj.com and Richard Rubin at richard.rubin@wsj.com

(END) Dow Jones Newswires

July 21, 2019 18:31 ET (22:31 GMT)

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