U.S. vs. Foreign Corporate Effective Tax Rates: A Move Back Home?

For many years a great deal of discussion in Washington centered on lowering the U.S. corporate tax rate. Because the 35 percent U.S. corporate tax rate was often substantially higher than those of other industrialized countries, many U.S.-based companies relocated some operations overseas. Income kept outside the United States was not taxed in the United States, resulting in many lawmakers supporting a lower tax rate to repatriate and collect taxes on those earnings.

On December 22, President Trump signed into law the Tax Cuts and Jobs Act (P.L. 115-97), which enacts several key changes that affect individuals and businesses. For businesses, changes include lowering the corporate tax rate from 35 percent to 21 percent, positioning the U.S. corporate rate slightly below the 22.5 percent average corporate tax rate of industrialized countries. Also, the legislation allows one-time repatriation of currently deferred foreign earnings at a substantially lower rate of either 8 percent or 15.5 percent (for cash), and it moves the United States to a territorial, rather than a global, tax regime. Those measures are designed to stimulate domestic growth and encourage companies to accumulate earnings and hire workers within U.S. borders.

Although the adoption of a 21 percent corporate tax rate will almost certainly affect many decisions within an international business organization, such an adoption might be erroneously predicated on the assumption that most U.S.-based companies were at a tax disadvantage without extensive usage of foreign operations. While the corporate statutory rate was much higher in the United States than in other industrialized foreign countries, a comparison between the effective U.S. tax rate and the effective foreign tax rate provides a more accurate measurement of a company’s tax burden. Comparisons between the effective rates may reveal under-reported cases in which operations within the United States produce a lower effective tax rate than operations overseas.

To determine the extent of those cases, this article examines the differences between the U.S. income tax expense percentage (calculated as the U.S. income tax current plus deferred income divided by U.S. pretax income from continuing operations) and the foreign income tax expense percentage (calculated as foreign income tax current plus deferred income divided by foreign pretax income from continuing operations). Because most foreign countries collect national taxes for distribution at the state and local levels of government, computations of the U.S. effective tax rate include state and local taxes to maintain relative comparability. These calculations are provided for more than 60 U.S. companies with fiscal years ending in 2016 or early 2017. The companies chosen are major U.S.-based companies with foreign operations and include various industries such as retail, finance, and manufacturing.

The Calculations

To illustrate the calculations used in this article, we use the pretax income from continuing operations and income tax expense for the year ended January 31, 2017, for Walmart Stores Inc. According to its annual report, Walmart’s pretax income from continuing operations was (dollars in millions) as follows:

Table 1

	Dollar Amount	Percentage
U.S.	$15,680	76%
Non-U.S.	$4,817	24%
Total	$20,497	100%

Income tax expense for the year was reported as follows:

Table 2

	Dollar Amount
Current
U.S. federal	$3,454
U.S. state and local	$495
International	$1,510
Deferred
U.S. federal	$1,054
U.S. state and local	$51
International	-$360
Total	$6,204

The percentage of U.S. income tax expense to U.S. pretax income from continuing operations is calculated as: ($3,454 + $495 + $1,054 + $51) / $15,680 = 0.322, or 32.2 percent. The percentage of international income tax expense to international pretax income from continuing operations is: ($1,510 - $360) / $4,817 = 0.239, or 23.9 percent. Thus, the percentage for taxes on foreign operations was less than that from U.S. operations. The overall effective tax rate is computed by dividing U.S. taxes plus international taxes by pretax income from continuing operations. For Walmart, the effective tax rate is ($5,054 + $1,150) / ($15,680 + $4,817) = 0.303, or 30.3 percent.

U.S. Operations Greater by 10 Percent or Less

Exhibit 1 lists 10 companies with pretax income from continuing operations in the United States that exceeded income from operations in foreign countries by less than 10 percent. For three companies, the percentage of income tax expense to pretax income from continuing operations was less than 10 percent higher for U.S. operations as opposed to foreign operations (Adobe Systems Inc., Cummins Inc., and Emerson Electric Co.). For seven of the companies, the percentage was greater than 10 (Akamai Technologies, Alphabet, Bristol-Myers Squibb Co., Illinois Tool Works Inc., Intel Corp., Walgreens Boots Alliance Inc., and Whirlpool). For six companies, the foreign tax percentage was less than 20 percent; for three of these six, the foreign tax rate was less than 10 percent. For every company, there were significant tax savings by earning at least 40 percent of their pretax income from continuing operations in foreign countries. The overall effective tax rate for all but one company (Akamai) was less than 31 percent.

U.S. Operations Greater by 10 Percent or More

Exhibit 2 lists 27 companies whose pretax income from continuing operations in the United States exceeded pretax income from foreign operations by greater than 10 percent. For six companies, the percentage of income tax expense to pretax income from continuing operations was higher for U.S. operations than for foreign operations by less than 10 percent (Brunswick Corp., General Dynamics Corp., JPMorgan Chase & Co., Mastercard Inc., 3M, and Walmart). For 10 companies, the percentage was greater than 10 percent (American Express Co., FedEx Corp., Genuine Parts Co., Harley-Davidson, Kraft Heinz Co., McKesson Corp., Target Corp., Texas Instruments Inc., The TJX Cos., and Visa Inc.). For nine companies, the percentage was higher for foreign taxes than U.S. taxes (Automatic Data Processing, Boeing Co., The Walt Disney Co., General Motors Corp., The Goldman Sachs Group Inc., Kimberly-Clark Corp., Monsanto Co., The Procter & Gamble Co., and Raytheon Co.).

Of the remaining two companies, Ford Motor Co. had U.S. pretax income from continuing operations of $3,852 million and a U.S. tax benefit of $545 million along with a foreign loss from continuing operations of $2,618 million and taxes of $548 million. Olin Corp. had a U.S. loss from continuing operations of $23 million and a tax benefit of $26 million along with a foreign loss of $11 million and a tax benefit of $4 million. Therefore, for 16 of these companies with pretax income from continuing operations in the United States exceeding such income in foreign countries, there were tax savings by earning less than 40 percent of their income in foreign countries, but for 10 of these companies, the percentage of foreign taxes was higher. The overall effective tax rate for 16 of these companies was less than 30 percent, including Ford and Olin, who had tax benefits.

Foreign Operations Greater by 10 Percent or Less

Exhibit 3 lists four companies at which foreign pretax income from continuing operations exceeded income from U.S. operations by less than 10 percent. Citigroup Inc. and Caterpillar Financial Services Corp. had higher foreign tax rates than U.S. rates. Honeywell International Inc. had a higher U.S. effective rate than a foreign one. eBay Inc. had U.S. tax of $821 million on U.S. pretax income from continuing operations of $1,529 million, a tax rate of 53.7 percent, along with a foreign tax benefit of $4,455 million on pretax income of $2,122 million, a tax benefit rate of 209.9 percent. The overall effective tax benefit rate for eBay was 99.5 percent on pretax income from continuing operations totaling $3,651 million.

Foreign Operations Greater by 10 Percent or More

Exhibit 4 lists 19 companies whose foreign pretax income from continuing operations exceeded U.S. operations by greater than 10 percent. For three companies, the percentage of income tax expense to pretax income from continuing operations was less than 10 percent higher for U.S. operations as compared to foreign operations (Applied Materials Inc., Colgate-Palmolive Co., and Lear Corp.). For 10 companies, the percentage was greater than 10 percent (Amazon.com Inc., which had foreign taxes of $24 million and a foreign net loss of $403 million; Apple Inc.; Cisco Systems Inc.; The Coca-Cola Co.; Cognizant Technology Solutions Corp.; Johnson & Johnson; McDonald’s Corp.; Nike Inc.; Oracle Corp.; and PepsiCo Inc.). For six companies, the percentage was higher for foreign taxes than U.S. taxes (Pfizer Inc., which had a net loss in the United States; Merck & Co.; Abbott Laboratories, which had a tax benefit of $76 million on U.S. pretax income of $306 million; United Technologies Corp.; BorgWarner Inc., which had a net loss in the United States; and International Business Machines Corp., which had a tax benefit of $360 million on U.S. pretax income from continuing operations of $3,650 million).

Oil and Gas Companies

Because of the recent steep decline in crude oil prices, large oil and gas companies experienced losses from U.S. continuing operations in 2016 and 2015 after previously profitable years. Exhibit 5 presents the tax percentage figures for five energy companies for 2014-2016.

From a tax standpoint, the companies did not seem to prosper from their foreign operations. Below are figures for income (loss) from continuing operations for 2016 for the five energy companies (dollars in millions):

Table 3

Company	Income (Loss)		Tax (Benefit)
	U.S.	Foreign	U.S.	Foreign
Anadarko Petroleum Corp.	-$3,728	-$101	-$1,309	$288
Chevron Corp.	-$4,317	$2,157	-$2,317	$588
ConocoPhillips	-$4,410	-$1,120	-$1,845	-$126
Exxon Mobil Corp.	-$5,832	$13,801	-$3,040	$2,634
Occidental Petroleum Corp.	-$2,698	$1,034	-$1,299	$637

 Conclusions

By comparing the effective tax rates of 60 U.S. companies (excluding oil companies) for U.S. and foreign pretax income from continuing operations, the following is ascertainable:

• For companies whose U.S. pretax income from continuing operations exceeded by less than 10 percent their foreign pretax income from continuing operations, the effective tax rate was higher for U.S. operations for all 10 companies analyzed.

• For U.S. companies whose U.S. pretax income from continuing operations was more than foreign pretax income from continuing operations by more than 10 percent, the effective tax rate was higher for U.S. operations for 16 of the 27 companies analyzed.

• For U.S. companies whose foreign pretax income from continuing operations was more than U.S. pretax income from continuing operations by less than 10 percent, the effective tax rate was higher for U.S. operations for two of the four companies analyzed.

• For U.S. companies whose foreign pretax income from continuing operations was more than U.S. pretax income from continuing operations by more than 10 percent, the effective tax rate was higher for U.S. operations for 13 of the 19 companies analyzed.

• For the five oil and gas companies, all of whom having a U.S. loss from continuing operations and all but one having a loss from continuing operations with both U.S. and foreign operations included, the effective tax rate was higher for foreign operations for 2014-2016 (except for Chevron in 2014) because all the companies had tax benefits from U.S. operations in 2015 and 2016, and two companies had tax benefits for U.S. operations in 2014.

Overall, the effective tax rate for U.S. operations was higher than for foreign operations for 41 of the 60 non-oil companies examined but was lower for 19 of the companies. Stated differently, 31.7 percent of the time, the foreign effective tax rate is currently higher for the sample of U.S.-based companies than the U.S. effective tax rate. Also, because of losses from continuing operations, the effective tax rate for foreign operations for U.S. oil and gas companies was higher than for U.S. operations.

These data suggest that multinational companies may not be as able to effectively leverage their tax burden by overseas operations as might be believed. If the tax burden was already lower for U.S. operations (before enactment of the TCJA), will the reduction in the statutory corporate tax rate present an incentive to companies to reconsider their operational locales? The decision to invest in overseas operations does not solely depend on the tax burden — many other factors are considered. For companies with a higher foreign tax burden, perhaps savings from the dramatic decline in the U.S. statutory rate will outweigh some other factors. The results of this study suggest that maintaining foreign operations may remain the choice of a material minority of U.S.-based companies.

Exhibit 1. Companies With Pretax Income From Continuing Operations in United States Exceeding That in Foreign Countries by Less Than 10 Percent

Company	Percentage ICOa: U.S. vs. Foreign	Percentage ITEb: U.S. vs. Foreign	Overall Effective Rate
Adobe Systems	56 vs. 44	16.6 vs. 9.1	18.5
Akamai Technologies	59 vs. 41	36.6 vs. 23.7	31.2
Alphabet	52 vs. 48	32.7 vs. 8.7	21.1
Bristol-Myers Squibb	52 vs. 48	33.6 vs. 13	23.8
Cummins	52 vs. 48	26.9 vs. 22	24.6
Emerson Electric	54 vs. 46	30.6 vs. 29	29.9
Illinois Tool Works	57 vs. 43	35.6 vs. 22.7	30
Intel	54 vs. 46	28.6 vs. 10.5	20.3
Walgreens Boots Alliance	50.1 vs. 49.9	34.1 vs. 11.7	19.4
Whirlpool	54 vs. 46	28.6 vs. 2.6	16.7
aICO is income from continuing operations (pretax). bITE is income tax expense.

Exhibit 2. Companies With Pretax Income From Continuing Operations in U.S. Exceeding That in Foreign Countries by More Than 10 Percent

Company	Percentage ICOa: U.S. vs. Foreign	Percentage ITEb: U.S. vs. Foreign	Overall Effective Rate
American Express	83 vs. 17	35.5 vs. 21.5	33.2
Automatic Data Processing	91 vs. 9	33.2 vs. 33.5	33.2
Boeing	93 vs. 7	10.5 vs. 32.8	12.1
Brunswick	79 vs. 21	29.9 vs. 28	29.6
Disney	94 vs. 6	32.6 vs. 59.5	34.2
FedEx	67 vs. 33	39.3 vs. 21.9	33.6
Ford	312 vs. (212)	(14.1) vs. (20.9)	0.3
General Dynamics	86 vs. 14	28.9 vs. 19.7	27.6
General Motors	95 vs. 5	16.9 vs. 198	25.7
Genuine Partsc	87 vs. 13	38.3 vs. 20.7	36
Goldman Sachs	61 vs. 39	26 vs. 31.9	28.2
Harley-Davidson	93 vs. 7	33 vs. 22.9	32.4
JP Morgan Chase	77 vs. 23	30.5 vs. 21.4	28.4
Kimberly-Clark	69 vs. 31	27.2 vs. 38.5	30.6
Kraft Heinz	67 vs. 33	34 vs. 14.4	27.5
Mastercard	66 vs. 34	29.5 vs. 25.4	28.1
Monsanto	73 vs. 27	21.8 vs. 70.2	33
McKesson	71 vs. 29	38.4 vs. 1.8	27.9
Olin	68 vs. 32	(113) vs. (36.4)	(88.6)
Procter & Gambled	66 vs. 34	21.2 vs. 30.8	25
Raytheon	97 vs. 3	27.8 vs. 43.1	28.3
Target	92 vs. 8	35.6 vs. 1.5	32.7
Texas Instruments	80 vs. 20	29.8 vs. 16.2	27.1
TJX	86 vs. 14	39.7 vs. 29.6	38.3
3M	62 vs. 38	29.2 vs. 26.9	28.3
Visa	73 vs. 27	31.9 vs. 7.4	25.2
Walmart	76 vs. 24	32.2 vs. 23.9	30.3
aICO is income from continuing operations (pretax). bITE is income tax expense. cAssumes all deferred taxes apply to U.S. taxes (current federal: $284 million, current state: $41 million, current foreign: $29 million, deferred $33 million). dDeferred international tax expense of $71 million decrease includes other (current international is $1,483 million).

Exhibit 3. Companies With Pretax Income From Continuing Operations in Foreign Countries Exceeding That in the United States by Less Than 10 Percent

Company	Percentage ICOa: U.S. vs. Foreign	Percentage ITEb: U.S. vs. Foreign	Overall Effective Rate
Caterpillar Financial Services	44 vs. 56	30.1 vs. 30.8	30.4
Citigroup	46 vs. 54	28.4 vs. 31.4	30
eBay	42 vs. 58	53.7 vs. (209.9)	(99.5)
Honeywell International	46 vs. 54	34.3 vs. 16.7	24.8
aICO is income from continuing operations (pretax). bITE is income tax expense.

Exhibit 4. Companies With Pretax Income From Continuing Operations in Foreign Countries Exceeding That in the United States by More Than 10 Percent

Company	Percentage ICOa: U.S. vs. Foreign	Percentage ITEb: U.S. vs. Foreign	Overall Effective Rate
Abbott Laboratories	22 vs. 78	(24.8) vs. 38.5	24.8
Amazon	(263) vs. 363	48.9 vs. (6)	(150.4)
Apple	33 vs. 67	66.8 vs. 5.2	25.6
Applied Materials	10 vs. 90	15.1 vs. 14.4	14.5
BorgWarner	(379) vs. 479	(28.8) vs. 26.2	15.9
Cisco Systems	23 vs. 77	29.7 vs. 13.2	16.9
Coca-Cola	1 vs. 99	292.9 vs. 15.6	19.5
Cognizant Technology Solutions	32 vs. 68	66.5 vs. 19	34.2
Colgate-Palmolive	32 vs. 68	33.2 vs. 29.7	30.8
International Business Machines	30 vs. 70	(9.9) vs. 9.3	3.6
Johnson & Johnson	38 vs. 62	29.4 vs. 8.7	16.5
Lear	34 vs. 66	31.9 vs. 25.4	27.7
McDonald’s	30 vs. 70	51.5 vs. 21.2	31.7
Merck	11 vs. 89	5.2 vs. 16.7	15.4
Nike	21 vs. 79	31.6 vs. 15.3	18.7
Oracle	35 vs. 65	35.4 vs. 15	22.2
PepsiCo	31 vs. 69	52.6 vs. 13.4	25.4
Pfizer	(102) vs. 202	(2.8) vs. 8	13.4
United Technologies	36 vs. 64	18.2 vs. 26.9	23.8
aICO is income from continuing operations (pretax). bITE is income tax expense.

Exhibit 5. Income Tax Expense (Benefit) Percentages for Energy Companies

Company	2016 U.S. vs. Foreign	2015 U.S. vs. Foreign	2014 U.S. vs. Foreign
Anadarko Petroleum	(35.1) vs. 285.1	(35.7) vs. 73.4	(4.8) vs. 49.4
Chevron	(53.7) vs. 27.3	(58.8) vs. 23.6	38.9 vs. 37.9
ConocoPhillips	(41.8) vs. (11.3)	(55.4) vs. (18.5)	20.9 vs. 43.8
Exxon Mobil	(52.1) vs. 19.1	(775.5) vs. 30	20.5 vs. 38
Occidental Petroleum	(48.1) vs. 61.6	(35.6) vs. 20.2	(21.4) vs. 81