No one wants to pay any more in taxes than they have to. But
government's fiscal situation
becoming increasingly dire, policymakers have started focusing on
the huge dilemma of where to get higher tax revenue without
threatening an already fragile economic recovery.
With that as background, the timing of
last week's revelation
paid nothing in U.S. income tax last year should come as no
surprise. But lost in the outrage over one of the nation's largest
corporations apparently contributing nothing to the public coffers
is a much simpler fact: Companies pay widely varying amounts of
tax, both from year to year and from industry to industry.
As fellow Fool Morgan Housel discussed this week, the fact that
financial stocks like GE,
have paid very little in taxes recently looks less like a
conspiracy and more like the result of an obvious fact:
Financial companies posted immense losses
during the banking crisis. With any income tax, no income should
mean no tax.
Moreover, low effective tax rates aren't limited to financial
stocks. According to figures compiled by CNBC,
(Nasdaq: WYNN) had an effective tax rate of 6% in 2010, quite a bit
less than the nominal 35% tax rate on corporate income as well as
the average actual tax rate of 20%.
(NYSE: PFE) also had a relatively easy time with its tax bill,
clocking in at just 12%. In a separate analysis from MF Global,
) paid less than 2% in taxes, while
(NYSE: RIG) came in at 14%.
On the other side of the coin, though, many companies actually
pay huge amounts of taxes. Both video-streaming sensation
(Nasdaq: NFLX) and upscale grocery chain
(Nasdaq: WFMI) paid 40% in taxes last year.
What's behind tax rates
As any corporate tax lawyer can tell you, trying to minimize taxes
for a company that does business globally is an intricate game.
Many different strategies exist that can help you cut your overall
Incorporating in low-tax jurisdictions
can help, especially if you can maneuver your operations to have
income flow to offshore subsidiaries that get taxed less harshly
while pushing expenses to higher-tax areas where the related
deductions have the most value. Also, a patchwork of tax credits
and incentives entice companies to take on certain projects to take
advantage of them.
Granted, from an outsider's perspective, all of this is so
convoluted that it can appear that corporations are trying to pull
a fast one. Online retailer
has drawn plenty of criticism for refusing to collect sales tax on
behalf of the vast majority of states in which it doesn't have a
major physical presence.
But as reform advocates would agree, the burden is on lawmakers
to make clear rules that fit well with the overall international
tax framework. Trying to piece together the jigsaw puzzle of tax
rules that exist throughout the world would be a hard enough task
even if all the countries involved cooperated with each other.
Given that many countries rely on their status as tax havens for
their economic survival, it will be even harder for the U.S. to
take the steps needed to make the corporate tax system work.
Don't let the tax tail wag the dog
From an investor's perspective, you shouldn't let taxes dominate
your thinking. As Bespoke Investment's Paul Hickey discovered, most
of the companies that have paid the highest tax rates have also put
in the best performance for their shareholders, while shares of
low-tax companies haven't done nearly as well.
In the end, the key to a successful company is for its business
to be profitable. Figuring out how to keep as much of those profits
away from the IRS is worth the effort, but first you have to make
sure the company will keep making money. If a company can't make a
profit, paying lower taxes is a poor consolation prize for
Add these low-tax companies to your watchlist to see how they
do going forward. And for more on getting your taxes in tip-top
shape, be sure to check out the Fool's Tax Center.
would never fool you about something as important as taxes. He
doesn't own shares of the companies mentioned in this article.
Pfizer is a
Motley Fool Inside Value
recommendation. Amazon.com, Netflix, and Whole Foods Market
Motley Fool Stock Advisor
selections. The Fool owns shares of Transocean. Try any of our
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