Publication: USA Today/Money
By Matt Krantz August 26, 2014 8:00 am
Burger King’s decision to combine with Canadian donut shop Tim Hortons is renewing controversy over the lengths some U.S. companies will go to reduce their tax bills. There are a handful of firms that could write the book on other ways to cut taxes.
Seven U.S-based companies in the Standard & Poor’s 500 index, including online ad firm Google (GOOGL), online travel agent TripAdvisor (TRIP) and pet supply retailer PetSmart (PETM), have paid a lower effective tax rate in each and every of the past five years. To weed out companies that are paying lower tax rates because they’re making less money, in order to make the list, the companies’ net income needed to also be higher in 2013 than it was five years ago. Stuffing money in overseas accounts far away from the grasp of Uncle Sam is a big reason for many of these companies successfully lowering their taxes, says Nicholas Yee at research firm Gradient Analytics, who has long been studying this tax-management technique. The effective tax rate indicates how much of a tax hit companies are paying to all governments.
What’s wrong about companies cutting their tax bill? Absolutely nothing. But investors are getting increasingly sensitive to the means and methods companies are using to cut their taxes. Lowering taxes is one way to boost profit to shareholders, which is one of the key reasons why companies exist. But investors are wondering which companies could be exposed if tax officials take a closer look at the rules and perhaps consider reform.
“To the extent that tax-planning strategies are legally allowed, they often result in a permanent reduction in the firm’s tax obligations,” according to Yee’s June report on the topic, not referring to any specific company. “However, there can be no guarantee that the reduction is sustainable.”