March 4, 2012 5:22 pm

US corporation tax rates hit 10-year low

The effective tax rate paid by large US public companies fell to its lowest in a decade in the fourth quarter last year as an increasing amount of revenue was generated outside of the country.

Though a handful of corporates, including General Electric, paid more tax than a year ago, many other companies are continuing the trend of paying less as a share of pre-tax income.

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IN US Politics & Policy

Corporate tax reform has been a major presidential campaign issue. Barack Obama and his Republican rivals are promising to slash the US’s 35 per cent rate, one of the highest statutory rates in the developed world, to encourage a return towards domestic investment.

According to figures compiled by Morgan Stanley, the unweighted average tax rate paid by the largest 1,500 US public companies by market value in the fourth quarter was 31.9 per cent of pre-tax income. About 100 companies are yet to report for the quarter.

That puts the period on track for the lowest average in any quarter since 2001 and off sharply from the 35.4 per cent paid a year ago.

A greater mix of non-US revenues was the primary driver, said Adam Parker, US equity strategist at Morgan Stanley. “There was a richer mix of foreign earnings, often in regions that have lower rates, continuing a long-term trend toward lower taxes paid,” he said.

For example, IntercontinentalExchange, the Atlanta-based derivatives exchange operator, said it beat analysts’ forecasts amid faster growth in London-based trading and clearing. The UK corporate tax rate is 26 per cent.

“Our focus is on generating the highest after-tax returns for our investors,” said Scott Hill, ICE’s chief financial officer. “All else equal, given current tax rates and future expectations, that biases us towards investments in London.”

Joseph Rosenberg, research associate at the Urban-Brookings Tax Policy Center, said corporations considered more than just tax rates in strategic location decisions.

Lower tax bills boosted many companies’ earnings in a quarter that otherwise saw the slowest yearly profit growth since 2009, according to S&P Capital IQ.

Morgan Stanley said in a review of 68 companies reporting lower-than-expected pre-tax income that 27 of them met or beat forecasts for net income by reporting lower-than-expected tax expense. “You need to have that context when judging earnings season,” said Mr Parker.

Though the average tax bill can vary, with some quarters distorted by some groups’ tax deferrals or lump-sum payments, the median is also falling. The median rate in the fourth quarter was 31.8 per cent among the 1,500 companies, with only the third quarter – at 31.5 per cent – seeing a lower value since 2001, according to Morgan Stanley.

Companies have benefited from tax breaks in recent years, including credits for research and development and bonus depreciation, though many of those expired at the end of last year.

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