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Effective Tax Rate Rises for Industrials

U.S.-based firms have higher ETRs than their global counterparts, but some will also benefit from favorable tax treatments they receive on their investments in emerging markets.

15Jun

The effective tax rate (ETR), or so-called real tax rate after expenses and tax offsets, was a volatile statistic during the financial crisis. The volatility has subsided for most firms amid the economic recovery, according to one study. At the same time, industrial companies have seen their ETRs rise.

A May PricewaterhouseCoopers report covering the ETRs of 324 industrial product and service companies across the aerospace, chemicals, transportation, and industrial manufacturing sectors shows that the average three-year ETR through the end of 2011 was 26.3%, up 0.7% from the year-ago tally of 25.6%.

Tax losses and changes in valuation allow- ances were key areas cited as having negative effects on ETRs. Specifically, 26 companies claimed this category as having an unfavorable impact, to the tune of about 1.1%.

But the study found some bright spots in the chemicals sector, which typically has invested in high-growth emerging markets. “Our analysis shows stronger recovery in the chemical and industrial manufacturing sectors than in engineering and construction sectors, where conditions are still challenging for some companies,” the report said.

As emerging markets develop and companies increasingly expand into these territories, more companies will benefit from the lower tax rates within developing countries, said Michael Burak, U.S. and global industrial products tax leader for PwC, in a statement.

Tax incentives improved the ETRs of 23 companies in the study. Companies benefited from incentives by 2.6% of their ETR, on average. Twelve companies reported domestic manufacturing deductions and 9 had research-and-development credits.

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