Retail sector Tax rate benchmarking - PwC

January 2016

Retail sector Tax rate benchmarking

About the study

In this study, we report on the findings from our analysis of key tax ratios of 49 large companies in the retail sector. The analysis provides insight into the effective tax rate ("ETR") and cash tax rate reported by these companies, the trend over the last three years and drivers of the ETR. The study uses publicly available data for the three years up to March 2015, sourced from data providers and individual company accounts. By using publicly available information, we can include any listed company, which gives us good coverage of the sector from which to identify trends. The companies in the study are spread across a number of subsectors: food retail and wholesale (11 companies), apparel retailers (10), broadline retailers (11), specialty retailers (6), drug retailers (4), specialty consumer service (3), home improvement retailers (3), and diverse industrial (1). Geographically, the companies span the globe with a bias towards US headquarters (27 companies), but also including three from Japan, two companies each from Australia, Canada, China, UK, France, and one company each from Belgium, Chile, Hong Kong, Mexico, Sweden, Spain, Russian Federation, Philippines and The Netherlands.

2 | Retail sector: Tax rate benchmarking

Contents

Introduction ............................................................................................. 5

1: Tax rate benchmarking in the retail sector................................... 8

1.1: ETRs in the retail sector.................................................................................. 9 1.2: ETRs of the retail sector compared to other sectors......................................... 10 1.3: ETR comparison for "domestic" vs. "multinational" companies...................... 11 1.4: ETR by subsector.......................................................................................... 12 1.5: ETR drivers................................................................................................. 13 1.6: Cash tax rate (CTR) in the retail sector......................................................... 16

2: US-headquartered retail companies............................................. 17

2.1: ETR for US-based companies compared to non-US-based companies............... 17 2.2: ETR drivers for US-based companies............................................................. 18 2.3: Unrecognized tax benefits............................................................................. 19 2.4: Unrepatriated foreign earnings.................................................................... 20

Appendices

1: List of companies......................................................................................... 22 2: Source of information and analysis.............................................................. 23

Contacts....................................................................................................... 24

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"Multinational companies can expect more scrutiny when filing their corporate income tax returns."

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Harry Doornbosch Global Retail and Consumer Tax Leader

Introduction

From tax simplification to the ethics of tax avoidance, the subject of tax has never received more public interest than it does today. When we published our last tax rate benchmarking report in 2014 we wrote "The global tax system has been the subject of much debate in recent years and never more so than in 2013." Since then, the debate has only increased.

Global developments

The Organization for Economic Cooperation and Development (OECD) and the G20 decided in 2013 to act upon a growing political and public debate about--at least perceived--income-shifting behavior of multinational corporations. Their initiative, called the base erosion and profit shifting initiative, (BEPS) caught traction very quickly and within two years 15 detailed, actionorientated plans were agreed upon and subsequently published in final form in 2015. The reports contain many actionable legal changes to be implemented by the OECD member states, as well as the many non-OECD states supporting the initiative.

The BEPS package will have an enormous impact on the behavior and actions of multinational companies, as well as on the behavior and actions of

governments and tax administrations around the world. A number of countries have already anticipated this and have implemented or are in the process of implementing tougher legislation--for example, anti-hybrid rules in Spain, transparency rules in Australia, anti-abuse rules in Canada and country-by-country reporting obligations in Ireland and the Netherlands. It can be expected, as a result of BEPS, that tax rates will increase, and a company's tax strategy, tax structure and tax profile will become more visible to the taxing authorities in which it operates.

Another development is the rebirth of the Common Consolidated Corporate Tax Base (CCCTB), which is an initiative to harmonize the corporate tax base.

Last but not least, in 2014 the EU started formal investigations to determine whether some multinational companies received illegal state aid from members states where they obtained a tax ruling. It is expected that final decisions on this will be published soon.

EU developments

In the EU a number of new initiatives have been implemented, designed to tackle what is perceived as tax evasion, avoidance, and unfair competition. One particular measure is a binding anti-abuse rule to be included in the EU Parent-Subsidiary Directive. In addition, the EU has adopted a tax transparency package--ensuring that information about all tax rulings within the EU will need to be reported and exchanged between the EU member states beginning January 1, 2017.

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In the spotlight

Not only are governments and tax authorities interested in the amount and effective tax rate a multinational company is reporting, but regulators, investors, shareholders, NGOs, the press and the general public are, as well. Multinational companies can expect more scrutiny when filing their corporate income tax returns. Tax authorities will have more information both at the national level and at the global level. This information will be used to review and potentially challenge the company's position. Multinationals should also expect more interest in the tax paragraph when filing their annual accounts. In fact, they should expect that all information will be available to all parties, making for a more level playing field. As a result, many companies are already making voluntary disclosures, such as their total tax contribution or their tax strategy.

This spotlight on tax holds true for companies in all industries, and especially for companies operating in the retail sector. It highlights the need for in-house tax functions and the executive boards of multinationals to be able to:

Explain the company's corporate income tax rate

Understand the tax strategy and policy

Ensure that the tax function is agile and prepared to adjust to a radically different landscape in the next three to five years

Explain the company's total tax contribution

6 | Retail sector: Tax rate benchmarkings

Impact on the retail sector

So, what impact has this changing landscape had on the retail sector? Retailers frequently operate mainly in domestic markets, and this has a significant impact on the average ETR. Our study shows an average three-year ETR of 32.4%--the highest of a number of industry sectors studied (see figure 2). Unfavorable drivers affecting that rate include the impact of US state taxes and nondeductible expenses, while favorable drivers include tax incentives and use of losses.

For the retailers in the study operating largely in domestic markets (mostly US-based), the rate is higher (34.9%) compared to retailers with a more international footprint (26.1%). For US retailers, the rate is higher still (36.7%) compared to non-US companies (24.4%).

32.4%

average three year ETR

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1: Tax rate benchmarking for the retail sector

Companies in the retail industry were operating in a challenging environment over the last year, with high inventory levels and currency fluctuations putting pressure on growth and increased demand for discounts from the consumer. According to the PwC 18th Annual Global CEO Survey1, 74% of retail CEOs are concerned about the change in consumer behavior and the factors that influence spending, such as higher taxes, unemployment and government debt.

Another significant challenge faced by the retail sector has been the change in the buying habits of consumers, as the trend towards browsing and buying online rather than making instore purchases increases. Companies that have embraced the change and invested in new technologies such as mobile apps have excelled, whereas those late to adapt have cited poor performance as a result.

However, the shift in economic power to emerging markets has created opportunity for businesses to exploit a huge new consumer market and, despite the challenges faced in the year, the PwC survey found that 84% of CEOs are confident about revenue growth prospects over the next 12 months2.

Tax is a cost to business and, for retailers, with typically low profit margins, this can be a significant cost. Tax rate benchmarking provides insight for tax teams into how their ETR compares to their peer group and how it has changed over time.

84%

of CEOs are confident about revenue growth

1 PwC 18th Annual Global CEO Survey: 2 PwC 18th Annual Global CEO Survey "Explore the Data" tool: 8 | Retail sector: Tax rate benchmarkings

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