Nominal Vs Effective Tax Rate
Introduction:
When making an investment in a company, investors want to make sure the company is well managed. Because the differences between effective tax rates of companies of equal size that perform similar functions in the same geographical region are generally due to managerial decisions, a company with the lower effective tax rate could have the better administration and therefore be a better investment. The statutory corporate tax rate is the rate that is imposed on taxable income of corporations, which is equal to corporate receipts less deductions for labor costs, materials, and depreciation of capital assets. In contrast, the effective corporate tax rate (ETR) measures the taxes a corporation pays as a percentage of its economic profit. As the pharmaceutical companies grapple with ways to grow revenues, reduce costs and compete with the generics, one area worthy of heavy focus is the overall effective tax rate. The first obstacle to reducing the effective tax rate is the ever increasing rate of regulatory and compliance requirements imposed by governments worldwide. Increasingly, taxing authorities are focusing on companies with extensive worldwide operations trying to challenge their business models, and often to tax additional income originally allocated and taxed in another (usually lower-rate) jurisdiction. Also, the downturn in the global economy has had far-reaching impacts forcing companies to focus on cost-saving initiatives, including headcount reductions, and putting stress on finance and tax departments alike. Although optimizing costs will always be important, reinvigorating Research & Development (R&D) will most likely be a top strategic initiative as well. Most big pharmaceutical companies are under competitive pressure from generic drug providers, and this pressure stands to grow more intense as a wave of patent expirations for certain “blockbuster drugs” occurs over the next few years. In many areas of the world, increasing spending on
When making an investment in a company, investors want to make sure the company is well managed. Because the differences between effective tax rates of companies of equal size that perform similar functions in the same geographical region are generally due to managerial decisions, a company with the lower effective tax rate could have the better administration and therefore be a better investment. The statutory corporate tax rate is the rate that is imposed on taxable income of corporations, which is equal to corporate receipts less deductions for labor costs, materials, and depreciation of capital assets. In contrast, the effective corporate tax rate (ETR) measures the taxes a corporation pays as a percentage of its economic profit. As the pharmaceutical companies grapple with ways to grow revenues, reduce costs and compete with the generics, one area worthy of heavy focus is the overall effective tax rate. The first obstacle to reducing the effective tax rate is the ever increasing rate of regulatory and compliance requirements imposed by governments worldwide. Increasingly, taxing authorities are focusing on companies with extensive worldwide operations trying to challenge their business models, and often to tax additional income originally allocated and taxed in another (usually lower-rate) jurisdiction. Also, the downturn in the global economy has had far-reaching impacts forcing companies to focus on cost-saving initiatives, including headcount reductions, and putting stress on finance and tax departments alike. Although optimizing costs will always be important, reinvigorating Research & Development (R&D) will most likely be a top strategic initiative as well. Most big pharmaceutical companies are under competitive pressure from generic drug providers, and this pressure stands to grow more intense as a wave of patent expirations for certain “blockbuster drugs” occurs over the next few years. In many areas of the world, increasing spending on