Global Project Finance > Tax Equity Telegraph > GAO Determines U.S. Corporations Pay an Effective Tax Rate of 12.6 Percent
21 Jul '13

In a report from the Government Accounting Office (GAO) to Congress that was made public on July 1, the GAO determined that in 2010 profitable U.S. corporations with assets of $10 million or more paid 12.6 percent of their pretax worldwide income in federal taxes.  The report is available here.

The report may seem too wonky to be of interest to a sexy industry like renewable energy, but so long as the American energy policy is effectuated through corporate income tax incentives the report should be of particular interest to renewable energy developers and the associated industries.  If large American corporations are paying only 12.6 percent of their worldwide income in federal taxes, they are likely to have little interest in tax credits and accelerated depreciation from renewable energy projects.  That means the market for tax equity is thin; therefore, the most critical component of developers’ capital structure is expensive and the economics of developing renewable energy projects are at best challenging.

Here are some excerpts from the report:

  • “For tax year 201, profitable [U.S. corporations] paid U.S. federal income taxes amounting to 12.6 percent of the [pretax] worldwide income reported in their financial statements.” (p. 14)
  • “Even when foreign, state, and local corporate income taxes are included [profitable U.S. corporations] actually paid income taxes amounting to 16.9 percent of their reported worldwide [pretax] income.” (p. 14)
  • “At about $242 billion corporate income taxes are far smaller than the $845 billion in social insurance taxes and the $1.1 trillion in individual income taxes that … were paid in fiscal year 2012.” (p. 4)

Martin Sullivan, an economist who studies tax matters, published a critique of the GAO’s study with important insights:

  • “Although, it is common knowledge that many U.S. multinationals have used tax planning to substantially reduce their tax bills, the GAO figure is surprisingly low.”
  • “[T]he GAO did not include foreign taxes in the widely reported 12.6 percent figure. It did in fact provide a much more conceptually defensible measure that includes foreign taxes in the numerator and arrives at a worldwide rate of 16.9 percent as a result.”
  • “The low GAO figure for foreign tax liability is attributable to the fact that Schedule M-3 data does not include taxes paid by foreign subsidiaries … .  [Thus GAO] was missing one of the most important aspects of the worldwide tax picture.”1

Sullivan also made several points of interest to observers of the market for tax equity.  For instance, “Multinationals in the oil and mining businesses generally pay very high rates.”2  Thus, Chevron, Shell and, previously, British Petroleum’s rationale for investing in tax equity and/or outright ownership renewable energy operations.  “And pharmaceutical, tech and other companies with lots of intellectual property have effective tax rates much lower than average.”3  Thus, the market has yet to see a pharmaceutical company acting as a tax equity investor, and the only tech company that acts as such is Google.

An aside in Sullivan’s critique is that he notes that “In the current environment … domestic tax credits are a relatively small part of the tax picture.”4  Thus, when Congress considers the causes of the low corporate federal income tax rate, it would be inappropriate to focus much on tax equity investments.

1 Martin A. Sullivan, Economic Analysis: Behind the GAO’s 12.6 Percent Effective Corp. Rate, 140 Tax Notes 197 (Jul. 15, 2013).

2 Id.

3 Id.

4 Id.