A Response to Disputes by Corporations over our Methodology
Since the release of Executive Excess 2011, several of the corporations included in our study have raised questions about our methodology. Here's our response.
Since the release of Executive Excess 2011, several of the corporations included in our study have raised questions about our methodology. We first address the three concerns we have heard and conclude with a comment on the value that improved tax transparency would have on corporations and stakeholders alike.
Responses to Specific Concerns
We have heard three general complaints from corporations
“We have taken a provision for income taxes, far greater than the number you cite.”
Ameriprise and General Electric have both expressed this position in response to our report.
The corporate provision for income taxes is comprised of two numbers, the current taxes paid in a given year and the deferred taxes which may or may not be paid in the future. The provision for income taxes does create a liability for the corporation, an acknowledgment that there may be taxes to pay in future years, and does record a charge to earnings. But the money for deferred taxes remains in the company’s hands where it can be put in the bank and earn interest, or buy additional equipment to expand. We have been clear in our report that we are focused on the current taxes as the best approximation of the net result of what corporations actually paid in a given year.
Why do we say deferred taxes may or may not be paid in the future? Because some forms of deferred taxes can be put off indefinitely. For instance, taxes on funds held offshore do not become due until those funds are brought home to the U.S. If these funds are never brought home, the taxes are never paid.
To create an analogy using two friends, one friend may give another friend a note saying they will give him or her $100 in 20 years. With this promise of deferred payment they’ve created a liability for themselves, but no reasonable person would seek to claim that the first friend paid the second the $100 in the current year. We have sought to measure that which actually changes hands, not that which might change hands years down the road.
One more word here: even the current tax reported is an approximation. For companies with a December fiscal year, tax filings are generally made in September, while 10-K reports with the SEC are filed in February or March. Thus, what makes its way into the 10-K report is the best guess at the time of the year’s tax position. But in most if not all cases, adjustments continue to be made up until the tax form is filed with the IRS.
“You’ve excluded all the taxes that we pay to states and foreign governments”
Several companies have responded by pointing to the large amounts they pay in state and local taxes, taxes to foreign governments and even payroll taxes. Verizon and eBay have both raised this objection.
Again we believe we have been clear that our focus is on corporate income taxes paid to the U.S. federal government. We did not investigate or make any claims about the taxes corporations paid to state, local, or foreign governments. The background for our report is a time when there is heightened focus on the federal government’s fiscal situation. Massive cuts to government programs are underway, including programs and government investments that benefit businesses. Our intent was to call into question whether corporations are paying their fair share toward the cost of government.
“Our tax refunds were the result of accounting adjustments and settlements.”
Accounting adjustments and tax settlements are common elements of corporate tax reporting and they do affect corporations year-to-year. eBay has issued a public statement saying that their refund in 2010 stemmed from a settlement pertaining to previous years’ tax returns.
In our report, we took a snapshot of a single year and did not attempt to adjust the numbers reported in the current tax provision for any of the companies in the study. We have noted in the report both that all of the ways corporations reduce their taxes are legal and also noted that in our opinion some are more legitimate, while others are not. We have not attempted to explain the reasons behind the particular current tax number for any of the companies in the report.
Clearer corporate tax reporting is in the interest of all
Objections by corporations to the way their taxes are calculated are not new. It happens almost every time a story is written about a particular corporation’s tax position. Journalists are caught in the middle of a “he said – she said” dispute and the public is left confused about who to believe.
We are reminded in our 18 years of work on executive pay that the disputes we now see about taxes used to happen around how CEO pay was calculated. The SEC stepped in and required that obtuse proxy statements, written in legalese, be re-written in plain English. Many corporations complained it couldn’t be done, but it has been and with great success. There remain today different ways of calculating CEO pay, but the differences are minor and the disputes over accurate numbers have all but disappeared.
We believe we are at the same point today with corporate tax disclosure that we were with executive pay a decade ago. There is obviously an enormous public appetite for more and clearer information on what corporations actually pay in taxes each year, and not just in this country, but in all of the taxing jurisdictions of the world. For instance, it would be informative to know what share of profits and taxes are being paid in places like the Cayman Islands or Luxembourg.
While the public is demanding more and clearer disclosures, corporate tax reporting has, in fact, grown more opaque and indecipherable, even to those with advanced degrees in corporate tax law. Some reporters who called us for clarifications reported to us that the corporate media relations officers that contacted them could not themselves explain what the numbers in the tax footnote meant. It is time for a change.
We are fortunate to have the work of the Extractive Industry Transparency Initiative (EITI), a cooperative effort between the activist community and energy and mining companies, that has established standards for report on taxes and other payments made on a country by country basis throughout the world. Country by country reporting has made a huge difference in understanding corporate activities and in cracking down on corruption in many nations.
One of the changes we advocate in our report is adopting country-by-country reporting standards for all corporations. Making these audited numbers available would reduce, if not eliminate, the disputes that we’ve seen in recent days over how much corporations really pay. While the vast majority of corporations oppose country-by-country reporting, we welcome any of the companies featured in our report joining with us to call upon Congress to enact country-by-country reporting, one of the provisions of the Stop Tax Havens Abuse Act discussed in our report.
Working together we might be able to bring the same clarity and transparency to corporate tax reporting that we have achieved in executive pay disclosures. Such transparency would benefit corporations and stakeholders alike.