Death and taxes are supposed to be two certainties of life. But a few companies have at least escaped the taxes part.
There are 27 companies in the Standard & Poor’s 500, including telecom firm Level 3 Communications (LVLT), airline United Continental (UAL) and automaker General Motors (GM), that reported paying no income tax expense in 2015 despite reporting pre-tax profits, according to a USA TODAY analysis of data from S&P Global Market Intelligence.
Only profitable firms were included in the analysis since firms that lost money – like many energy companies – wouldn’t be expected to pay taxes.
Escaping the taxman, so far, hasn’t been an advantage at least in the eyes of investors. Shares of the companies that paid no taxes are down 11% on average over the past 12 months, which is more than twice the 4.8% decline in the S&P 500 during the same period.
The underperformance might come as a bit of a surprise given how much time and effort some companies have put into lowering their tax bills.
“Income tax issues, while important, are not as important as how well as the company is doing or how well an industry is performing,” says Bill Selesky, investment analyst at Argus Research. “It gets to be an issue that I would put at the bottom of the list.”
Yet, investors have paid closer attention to the tax rates companies pay as profit growth continues to stall along with revenue growth.
Companies must find any way possible to boost their bottom line, which for some involves looking for ways to reduce their tax liabilities.
Some have taken advantage of lower overseas tax rates, a practice that has drawn criticism. Drugmaker Pfizer (PFE) last year, for instance, drew fire last year for a plan to merge with rival Allergan (AGN) and move its headquarters to Ireland.
And on Sunday night, Presidential candidate Hillary Clinton took aim Johnson Controls (JCI), which is planning to merge with Tyco (TYC) and move its headquarters to Ireland.
“I am also going to go after companies like Johnson Controls in Wisconsin,” Clinton said. “They came and got part of the bailout because they were an auto parts supplier. Now they want to move headquarters to Europe. They are going to have to pay an exit fee. We are going to stop this kind of job exporting and we are going to start importing and growing jobs again in our country.”
Three of the 27 companies that paid no income tax in 2015 are based outside the U.S. including healthcare firm Mallinckrodt (MNK), financial firm Willis Towers Watson (WLTW) and insurer XL Group (XL). Several are real-estate investment trusts (REITs). Their unique “pass-through” accounting, which shifts the tax burden to shareholders rather than the company itself, has become a more popular structure as companies look to convert to REITs.
There are a number of reasons why a profitable company may not pay taxes. For instance, years of deep losses can affect a tax bill.
Take United Continental, which reported a $3.2 billion income tax credit in 2015 despite reporting earnings before taxes of $4.2 billion. Accounting rules allow the airline to offset taxes due with valuation allowances resulting from losses in past years. During 2015, these allowances amounted to $4.7 billion which erased the company’s $1.5 billion tax bill based on its normal corporate tax rate.
It was a similar situation at Level 3. The company booked a tax credit of $3.2 billion in 2015 despite recording a pre-tax profit of $283 million in the same year. The tax gain was the result of credits associated with losses in previous years in addition to losses at Colorado-based TW Telecom, which Level 3 bought in 2014.
Not all companies breakdown in detail where they paid taxes, be it in the U.S. or elsewhere. But the location can be important to the overall taxes companies pay.
In 2015, General Motors saw a tax credit off of $1.9 billion, even though its earnings before taxes hit $7.7 billion. Uncle Sam got his due, as the company reported a U.S. federal income tax expense of more than $1 billion. Yet the company’s global tax bill was a credit thanks mostly to a tax break connected with General Motors Europe.
Investors, though, should know many of these tax breaks and credits will likely eventually run out. United’s 2015 annual regulatory filing warns investors as much: “The Company anticipates its effective tax rate will be approximately 37%, which reflects a more normalized rate after the release of the tax valuation allowance in 2015 and is based on the Company’s relative mix of domestic, foreign and state income tax expense.”
And at GM, “this benefit will slowly dissipate over the 2016 and 2017 time frame,” says Argus’ Salesky says. He doesn’t think it will be a problem, though.
“Assuming a decent global economy and a good mix of international revenue versus domestic U.S. revenue, GM should not have a problem counteracting that tax credit with better sales performance in some other part of the world,” he says.
But when these companies’ credits run out – the taxman will be waiting for his due.
Contributing: Ed Brackett