Some of the most sought-after data during corporate takeovers are the internal income tax documents of the business getting acquired.
“I suspect it’s because the accounting for income taxes is often an area where the disclosures provided to the public are opaque,” Donald Nicolaisen, then-chief accountant for the Securities and Exchange Commission, said in a 2004 speech.
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Ten years later, Nicolaisen told the Tribune that additional disclosure requirements have forced companies to be more open but that “taxes remain a substantial concern for many companies due to the myriad number of taxing jurisdictions, the significance of the numbers, and the complexities of tax regulations.”
With that in mind, here is some basic information about corporate taxes:
*The U.S. corporate income tax rate begins at 15 percent and rises to 34 percent on taxable income of more than $75,000. At $10 million, the 35 percent rate begins kicking in.
*That 35 percent “statutory” rate is applied to income earned both domestically and abroad.
*The United States is unusual among many other developed countries in that it taxes profits made outside its borders.
*One important caveat: U.S. companies aren’t required to pay the U.S. taxes on foreign income if that money is continually reinvested overseas and not brought back, or repatriated, to the U.S.
*State and local governments may also impose income taxes, and a corporation may deduct state and local income tax expenses when computing its federal taxable income. That generally results in a net “effective” rate of about 40 percent, the accounting firm KPMG said.
But the 35 percent statutory federal income tax rate can differ dramatically from what’s called the effective tax rate for a corporation. The U.S. tax system, for example, has deductions, exemptions and credits that might lower companies’ effective tax rates below the statutory corporate income tax rate.
Public companies’ annual reports, filed with the SEC, disclose their income tax expenses, including detailed information about the company’s current and deferred income taxes. The information also is broken down by level — federal, state, local and foreign — and the main items that affect the company’s effective tax rate are described. Quarterly reports provide less detail.
Take Chicago-based Archer Daniels Midland. Its effective tax rate in 2013 was 33 percent, and it listed $670 million in income taxes on $2.02 billion in pretax earnings.
In all, ADM paid $469 million to federal and state authorities, and $201 million internationally, company documents show.
U.S. corporations must also explain why their effective tax rates — what they actually pay — might differ from the statutory federal income tax rate of 35 percent.
ADM did this in its annual report by showing the step-by-step math of how it ended up with a 33 percent effective tax rate.
The company outlined seven factors that added to, or subtracted from, the statutory federal income tax rate. For instance, state income taxes added 0.2 percentage points to the 35 percent statutory federal income tax rate. But foreign earnings taxed at rates other than the U.S. statutory income tax rate helped reduce ADM’s taxes by 3.7 percentage points, and a U.S. tax benefit related to biodiesel credits reduced it by an additional 5.1 percentage points.
Still, other taxes can be tucked into other spots.
Property and excise taxes, for example, are typically considered an operational expense, said William Henson, a Plante Moran international tax partner.
Therefore, “income before taxes” is a misnomer in that it includes property and excise tax or any other tax unrelated to income, Henson said. Such taxes are sometimes referred to as an “above the line” tax, Henson said.