One of the key ingredients to any successful tax strategy is achieving and sustaining a competitive tax rate. As a result, a company’s tax rate is increasingly found on boardroom agendas. On the one hand, taxes are a significant cost that needs to be controlled and managed to create shareholder value and maximise earnings per share. On the other hand, the amount of tax paid by large corporations is coming under increasing scrutiny and public debate, and companies need to consider their reputation with a wider group of stakeholders.
To gain an understanding of the effective tax rate trend, PricewaterhouseCoopers (PwC) has recently completed a benchmarking study, compiled from publicly available financial information, of the effective tax rates of companies listed on the Australian Securities Exchange which make up the ASX100. The graph on page 2 shows the effective tax rate for the ASX100 over the last 3 financial years. Of particular interest, it shows the effective tax rate has gradually increased over the last few years, largely as a result of base-broadening measures by government, and has stabilised at a little over 26%.
A company’s effective tax rate is calculated from its Income Tax Expense as a percentage of Profit Before Tax, per the Income Statement. The trimmed average represents the average ratio for companies, excluding outliers and measures global income taxes for accounting purposes. While the trimmed average is the average for all industries, the effective tax rate varies quite significantly between industries.
This benchmarking data will enable individual companies within the ASX100, as well as other companies, to identify how effectively they manage their tax rate and how the tax rate has moved compared to the overall trend. A comparison of individual companies against the ASX100 or industry benchmark will raise issues for individual consideration. These considerations could include whether tax is being actively managed, if all appropriate planning opportunities are being pursued, or possibly if there are any significant risk management problems. The graph also provides an example (Company X) of an individual company benchmarking exercise.
The data will enable companies to benchmark against direct peers and to review the drivers of their respective tax rates, an exercise that the Australian Taxation Office already performs!
We anticipate the benchmarking study will enable a company to make informed planning and risk management decisions, and set a strategy around competitive and sustainable tax rates.
For further information please contact your usual PricewaterhouseCoopers Adviser, or:
