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Worldwide Effective Tax Rate A well-known saying in business is that “we manage what we measure.” The concept and measurement of a corporation’s worldwide effective tax rate perhaps inevitably led to attempts to manage it. Those attempts may have had unexpected consequences for the corporate tax function, which now bring into question the reporting structure for the CTO. The concept has an uncertain history. Definition The term “worldwide effective tax rate” appears at least as early as 1976 in an article noting that a multinational’s worldwide effective tax rate would increase to the extent the parent’s stewardship expenses could not be deducted for purposes of foreign country taxes, and the foreign taxes are not creditable against domestic taxes.1 The earliest use of the term may be in the Phibro Corp. Annual Report (dated Dec. 31, 1981), which stated that the worldwide effective tax rate dropped from 30.5% in 1979, to 20.8% in 1980, to 3% in 1981, compared to the 46% U.S. statutory rate. A PR Newswire report on first-half earnings of A.H. Robins Co. noted its worldwide effective tax rate on July 22, 1981. The concept is sometimes used as a “neutral” explanation for decreased profits, as when Polaroid explained a second-quarter profit decline by pointing to an increase in its worldwide effective tax rate from 34% to 52%.2 The importance of the concept has not gone unnoticed by industry groups. For example, the Tax Executives Institute has sponsored conferences on topics such as “Managing Your Company’s Worldwide Effective Tax Rate.” The concept also appears in a 1998 survey of senior tax persons at Fortune 500 corporations who were asked which goals are effective measures of a corporate tax department’s performance.3 The percentages of respondents checking the following goals were:
The same survey asked which measures directly affect the senior tax person’s compensation:
The fifth ranking of the tax rate in both sets of responses could be deceptive, because in both of these measures, the effective tax rate measure is subsumed in the preceding measures. Observers have made the obvious point that targeting an “arbitrary” worldwide effective tax rate is questionable, because the lowest legally achievable tax rate is likely to be either more or less than any arbitrary standard.4
__________________________ 2 See Sanchez, “Polaroid Profit Drops; Higher Tax Rate Cited,” L.A. Times (7/22/88), p. 3. 3 See Arlinghaus, “Goal Setting and Performance Measures - by Tax Professionals in Fortune 500 Companies,” Tax Executive (11/1/98), Tables XIV and XX, available at www.findarticles.com/p/articles/mi_m6552/is_6_50/ai_53510352. 4 See Goodman, “Internal Controls for the Tax Department,” 2004 TNT 86-23 (5/4/04), n. 8. |
