It’s common knowledge that global expansion can change the complexion of a corporation’s taxes. You’ve probably heard about companies moving their headquarters overseas for a more favorable tax climate or a change in obligations. But what does that mean? Let’s take a look at the 10-K data in some public pharmaceutical companies to examine what these changes in tax truly look like, and how it’s changed their expenses.
Bristol-Myers Squibb has significant operations in France, Japan, Canada, Spain, Italy and Mexico. As the data indicate above, unremitted foreign earnings (UFE - the blue bar graph) have increased for the corporation from just over $15 billion in 2010 to $25 billion in 2015, indicating that the company is permanently reinvesting its earnings from these countries and not repatriating them back to the U.S. During this same period, the effective tax rate due to foreign tax rate differential (the reduction of the company's effective tax rate due to operations in more favorable tax jurisdictions) has reduced by over 10%. This shows that an increase in foreign operations has caused a substantial impact on tax obligations in the past five years, which can contribute to the company’s overall total valuation.
It is interesting to note that unremitted foreign earnings do not necessarily directly correlate with improvements in taxation. Note that UFE increased between 2012-2015, but the effective tax rate also increased. This can be due to several other factors, including mergers, increased domestic earnings, or other taxable events.
Merck’s financials tell a similar story, but now that we know foreign earnings and effective tax rate are inversely related, the data begins to tell a deeper story. We can see that UFE and effective tax both increased in 2010-11. A quick scrub of Merck history reveals that the company acquired Schering-Plough in a ‘reverse merger’ in 2009, which could have contributed to a rise in taxation in the subsequent two years. In that same time, Merck established a footprint in Canada, which does account in some part for a larger shift in UFE. After that period, we can see a return in the inverse proportionality between UFE and effective tax rate.
Revenues from Pfizer operations outside the U.S. of $28.3 billion accounted for 57% of total revenues in 2009. By 2015, this number was up to $80 billion, culminating in a merger and inversion with Allergan in 2015. Pfizer-Allergan presently has a large footprint in Ireland, noted for its favorable corporate tax rate (12% versus the American 35%). It also has one of the most drastic declines effective tax rate (over 12%), due in large part to this operational movement. A deeper examination of the 10-K data would yield a more granular view of this drastic decrease in effective tax rate.
Global expansion for effective tax rate contraction.
By expanding operations overseas, companies can increase their unremitted foreign earnings and reduce their effective tax rate overall. Since these earnings are unremitted, they often don’t return to America and are never subject to the standard corporate tax rate. This is a standard method of reducing tax obligation, and isn’t confined to large pharmaceutical companies.
The real insight here?
Without standards-based data and a platform like idaciti, it would be nearly impossible to gather, visualize and understand the story behind these activities. If you’re a company that’s considering global expansion, data like this can help you understand the ramifications of your roadmap.