Friday, January 28, 2011

Tax policy

As some of you may be aware, I report average effective tax rates for US companies, by sector, at the start of every year. Yesterday, that data was picked up by the New York Times and has got plenty of publicity since.
http://www.nytimes.com/2011/01/28/us/politics/28tax.html?_r=1
Today, I have heard from both sides of the debate. from tax lobbyists  that feel that the low tax rates reported for some sectors do not reflect reality and also from those who believe that companies in the US don't pay their fair share.

Before I dive in, I want to be clear that the tax rates on my website were never intended for a tax policy debate. My interests are more mundane - computing cost of capital and value - and tax rates are raw material that I use to these numbers. Here is how I compute the averages. I compute the effective tax rate for a company by dividing its taxes paid by the taxable income; if the company is losing money and pays no taxes, I set its tax rate to zero.  For my purposes, I need an average tax rate for all companies in a sector, money making as well as losing, to compare valuation multiples and costs of capital across sectors. That is the number (a simple average of effective tax rates for all firms in a sector) that was reported on my site and picked up by others.

However, that average may not be an indicator of what a profitable firm in that sector pays as taxes, especially if there are  large numbers of money losing firms (as is the case with the biotechnology sector). To remedy this, I have decided to expand my tax rate table to include an additional statistic - an average tax rate for only money making firms. If you get a chance, you can see the data here and download it.
Note that these tax rates are much higher than the original averages. The average tax rate across companies that have taxable income is more than 29%, whereas the overall average across all firms (including the money losers) is just above 15%.

You can draw your own conclusions from the data, but here is my reading:
1. The average US company pays its "fair share" of taxes: I know that there will be many who disagree with me on this premise but the facts back me up. I computed the average effective tax rate for companies globally and here is what I got:

 Global Region Number of firms Effective tax rate Taxes as % of Revenues Australia, NZ and Canada 3834 26.65% 3.38% Developed Europe 4818 28.49% 2.51% Emerging Markets 17079 21.63% 3.15% Japan 3584 38.30% 2.39% United States 5472 29.35% 3.01% World 34787 27.17% 2.82%
The average money-making firm in the US pays about 29% of its taxable income in taxes, which is higher than the tax rate paid by most European, Asian or Latin American companies. Only Japanese companies have higher effective tax rates.To be fair, the taxable income may be lower in the United States than in other countries because of sundry deductions, but here is a comparison that dispenses with this problem. The average US company pays 3% of revenues in taxes, roughly similar to what companies in other countries pay.
2. There is much higher variance in tax rates across companies in the US than in other countries: Here is where I think our excessively complicated tax code has an effect. There is much higher variance across the tax rates paid by companies in the US, as companies in some sectors are given tax deductions and credits and others are not. I will wager that US companies spend more on tax lawyers and consultants than companies elsewhere.
3. There is a much bigger difference between the effective and marginal tax rate in the US than in other countries.  Note that the average effective tax rate across companies is less than 30% whereas the marginal tax rate in the US is close to 40% (with state and local taxes). The difference is far smaller in countries with simpler tax codes. In Japan, for instance, the marginal tax rate is 41% but the average effective tax rate is 38%.

Having laid that data question to rest, here are my thoughts on the tax policy questions, for what they are worth.
1. Investment decisions should be driven by economics and not the tax code:   The more complexities (and goodies) that we build into the tax code, the more we risk having investment decisions determined by tax law and not by economics.  I would rather have all companies pay a 25% tax rate on taxable income, with no special deductions and credits, than have an average tax rate of 25% with wide variations across investments and companies.
2. Borrowing decisions are driven by marginal tax rates: Decisions by firms on how much to borrow are driven by the marginal tax rate and having a high marginal tax rate will induce more borrowing across the board. If you use load the tax code with deductions and credits, you have to raise the marginal tax rate to compensate and with it, you raise the amount of debt that companies will carry. If we truly want to bring down financial leverage at US companies, we have to start by making the marginal tax rate lower.

Do I think that this latest move to simplify the tax code and lower tax rates will work? I am not hopeful and here is why. To keep that change revenue-neutral, we also have to start stripping the tax code of some of the deductions and credits. Unfortunately, that will make it a zero-sum game, at least in the short term, where some sectors will have to pay more in taxes while others will save. In the long term, I believe it will make the economy stronger, but who has the patience of the long run, when it comes to taxes?

Mike said...

Good one.

Here is a cynical view:

1.A change in tax code will give incentive to companies and individuals to find, devise and use new loopholes.

2. A change in tax code will not have much impact on Offshore profits (ex: GOOG) and off- balance sheet accounts.

3. How many lobbyists are there in Washington and what is their job?

http://www.amazon.com/Hoodwinked-Economic-Reveals-Financial-Imploded--/dp/0307589927/ref=sr_1_1?s=books&ie=UTF8&qid=1296314108&sr=1-1

This might be outside your field of expertise. However, I urge you to start reading it. Once you start, I will be surprised if you do not finish it.

JPWoodland said...

Imagine the impact on innovation if companies focused solely on what they make/provide and not on gaming the tax system. And imagine the increae in valuations with the money saved on those activities.

Aswath Damodaran said...

Exactly. Mike is right insofar that there are far too many groups that make money of a complex tax code who will fight tooth and nail to keep it complex... But do we want to become a country of tax accountants and lawyers?

Thomas said...

We have now, by my count, at least 3 versions of how you supposedly calculate "effective tax rate".

First, this from the NYT:

"I compute the effective tax rate for a company by dividing its taxes paid by the taxable income; if the company is losing money and pays no taxes, I set its tax rate to zero".

http://economix.blogs.nytimes.com/2011/01/27/corporate-taxes-more-winners-and-losers/

Then, when challenged by a reader, the NYT came up with this (see comment section):

"The actual formula is 1 — (aggregate reported net income/aggregate taxable income)".

Now, we have your version here that indicates one should divide "taxes paid by taxable income".

Not too be too pedantic about it, but since we are talking about "effective tax rates", I think the least we can do is be clear about how it is computed.

According to the New York Times article, the "effective tax rates were computed by using financial data from over 5,000 publicly listed companies. Therefore, I take it that the effective tax rate is on global income and not merely domestic (US income). Thus, as pointed out in an extensive comment to that NYT article, the "effective tax rate" involves taxes and tax rates imposed by non-US jurisdictions as well as the US. Thus, to the extent that the US companies derive income from outside the US and are subject (for whatever reason) to lower foreign taxes, this drives the reported "effective rate" down.

It would be useful if you could confirm your methodology in this respect.

Now, as to that precise definition of "effective tax rate", the NYT has sort of corrected the misunderstanding in response to a reader comment, but that main text of the NYT piece has not been corrected. That's unfortunate and makes you look a bit silly. Unless readers of that NYT piece actually read all the comments, they come away with a very false impression.

Of course, the need for the "effective tax rate" concept arises in the first place because of the differences between income computed for financial book purposes and income computed for tax purposes. To the extent that the latter is lower than the former, the effective tax rate goes down. If I take your latest version (as reported here) and divide taxes paid by taxable income, I should always come up with an effective federal tax rate of about 35 percent (ignoring NOL carrybacks or forwards). Surely, that's not what you did (or did you?) So, I suppose what you really mean is that one divides the taxes accrued by the aggregate pre-tax income reported for book purposes to get the "effective tax rate" (and, as supplemented by comments here ignoring loss companies). (The "formula" as later corrected by the Times works, too, but is needlessly obtuse unless one is overly fond of mathematics). Note that I have used taxes accrued (not "paid" as you state) because that is the accounting method required of such publicly listed companies from which you draw your data.

Thomas said...

Sorry, but all these versions are confusing. In my original post I incorrectly attributed to the NYT article the version you give here. Here is (I think) the correct sequence:

(1) NYT original:

"He derived the effective tax rate for each industrial sector by dividing the aggregate reported net income by the aggregate taxable income".

"The actual formula is 1 — (aggregate reported net income/aggregate taxable income)".

(3) Here:

"I compute the effective tax rate for a company by dividing its taxes paid by the taxable income; if the company is losing money and pays no taxes, I set its tax rate to zero".

This raises another issue. I take it, and perhaps you could confirm, that the original NYT data was derived by "setting the rate to zero" for loss companies as you state here. Unfortunately, that important fact was not mentioned in the NYT article. Here, in the expanded version, I take it that you have eliminated those companies altogether from the averages.

Thomas said...

And to be clear, I'm talking about the piece in the Economix blog, not the NYT article on the same subect.

Thomas said...

Sorry to be so persistent, but here's another question. It is not entirely clear from this, the NYT article or the Economix blog piece from which year or years your data is derived. I suspect based on the article that the data is from 2009 only. If that is the case, then would't the results be somewhat affected by the various provisions of the “American Recovery and Reinvestment Tax Act of 2009”, much of the purpose of which was to drive down "effective tax rates" so as to stimulate the economy? Not only would the results be skewed by the special tax provisions, but also the fact that the US was in the midst of a very major recession.

Aswath Damodaran said...

Thomas,
I can control what I say on my site and have little say in what gets put into the New York Times. So, here is what I do:
a. I take the reported taxable income of every company (which includes whatever global income that finds its way there: that is a function of the tax code and the way international subsidiaries are set up.
b. I take the taxes paid from the income statement of each company.
c. I divide the taxes paid by the taxable income for each company to get a tax rate. If the taxes paid are zero, I report an effective tax rate of zero. For almost companies with negative tax rates, this number will be zero.
c. I take the average across the effective tax rates of all companies in a sector. I also take the average of only the companies that make taxable income. Those are the two rates that I report.
d. I did compute but did not put in an aggregate tax rate computed by dividing the total taxes by the total taxable income of all of the companies in the sector. Think of that as a weighted average tax rate.

Aswath Damodaran said...

Thomas,
I can control what I say on my site and have little say in what gets put into the New York Times. So, here is what I do:
a. I take the reported taxable income of every company (which includes whatever global income that finds its way there: that is a function of the tax code and the way international subsidiaries are set up.
b. I take the taxes paid from the income statement of each company.
c. I divide the taxes paid by the taxable income for each company to get a tax rate. If the taxes paid are zero, I report an effective tax rate of zero. For almost companies with negative tax rates, this number will be zero.
c. I take the average across the effective tax rates of all companies in a sector. I also take the average of only the companies that make taxable income. Those are the two rates that I report.
d. I did compute but did not put in an aggregate tax rate computed by dividing the total taxes by the total taxable income of all of the companies in the sector. Think of that as a weighted average tax rate.

Thomas said...

Sorry Professor, but based on your description it doesn't sound to me as though you even understand what an "effective tax rate" is. As I indicated in my earlier post, the whole point of looking at "effective tax rates" is that "taxable income" very often diverges widely from "book income". Book income is determined by the appropriate accounting conventions (GAAP in the case of the US) and "taxable income" is determined by rules set out in the Internal Revenue Code. The different methods of computing income for book and tax purposes explains why we have an "effective tax rate" that diverges; sometimes widely, from the statutory tax rates . For example, the tax code might provide a more rapid write-off of intangibles than accounting rules for financial statement purposes. For reasons that are obvious to me, but apparently not to you, the use of "taxable income" for this purpose isn't even possible. Why not? The reason is because the income reported in financial statments is income determined under financial accounting standards, not income determined under the tax code. The latter information is contained in a corporation's corporate income tax return(s) which you don't even have access to. What I suspect you did was take the tax accrued for the period as reported in the published annual financial statements and divided that by the company's global consolidated book income, again as reported in that same financial statement.

Granted, you don't have complete control over what the NYT writes, but you certainly have control over what you write here. Perhaps the NYT would give you the opportunity to set the record straight.

Mike said...

I my view, while you are fixated on the tax rate, you are ignoring other major items related to the tax.
Even if you spend hundreds of hours and arrive at a more accurate number, you will not have addressed the off-balance sheet accounting and other tricks used to cheat.
Another item : The financial institutes pay billions (yes, billions) of dollars in bonus and then claim a loss. So, they pay no taxes, but contribute to political campaigns.

I have read about big banks getting a huge tax write off in 2009 profits due to the losses in 2008.

Bottom line : In your analysis, I am seeing a disconnect with reality.
Granted, this might be outside your field of expertise - if that is the case, please state so.

Aswath Damodaran said...

Mike,
I thought the message I was trying to convey was that to me the tax rate is a means to an end, not an end in itself. In fact, I am the exact opposite of obsessed with this number.
Before you buy too much into the "US companies as tax evaders" camp, here is a number to keep in mind. US companies pay 3% of their revenues in taxes, roughly in line with what companies elsewhere in the world pay. That suggests to me that they are not collectively playing the tax cheating game.
Are there some companies that exploit the tax code to unseemly effect? Sure, but we are making it easier for them to do with a complex code, not more difficult. I am not suggesting changing the tax code as much as stripping it down to basics.

Aswath Damodaran said...

Mike,
I thought the message I was trying to convey was that to me the tax rate is a means to an end, not an end in itself. In fact, I am the exact opposite of obsessed with this number.
Before you buy too much into the "US companies as tax evaders" camp, here is a number to keep in mind. US companies pay 3% of their revenues in taxes, roughly in line with what companies elsewhere in the world pay. That suggests to me that they are not collectively playing the tax cheating game.
Are there some companies that exploit the tax code to unseemly effect? Sure, but we are making it easier for them to do with a complex code, not more difficult. I am not suggesting changing the tax code as much as stripping it down to basics.

Aswath Damodaran said...

Thomas,
I entirely understand what you are trying to say. The taxes are paid on the tax income and not on book income. But here is the catch. We do not have access to tax income and we use book income and book accounting values to do valuation. When applying a tax rate to book income, the tax rate you want to apply is the tax rate based on that income, not the one based upon tax income.
So, I plan to stick with my measure of the effective tax rate (which is the same measure that Capital IQ, Value Line and every other data service uses) since it serves my needs.
There is actually a very simple solution to this problem. Require companies to maintain one set of books and financial statements will become more informative. That is already the case in much of the world but not yet in the US.

Thomas said...

Glad that you understand what i'm saying, but your response is merely obfuscation. The fact is, as I've repeatedly said, the "effective tax rate" is calculated as the taxes accrued during the financial period divided by the book income for that same period. You wrote: "When applying a tax rate to book income, the tax rate you want to apply is the tax rate based on that income, not the one based upon tax income." Well, who the heck is saying something else? So, let's cut the crap.

You are trying to do a 180° turn here in order to obfuscate the original mistakes. So, now you've admitted that it is not "taxable income" you've used but book income. I'm glad we've at least resolved that. This is a very serious public policy issue that supercedes, I hope, the egos involved.

For the rest, you've been used by the NYT whose cub reporter has taken your data and sent it around the world in a highly misleading article.

I've got nothing against you personally, but frankly I'm sick and tired of charlatans and politically motivated reporters misleading the public on important public policy issues.

Here's my suggestion: Go back to the NYT and tell them you want to set the record straight with your own submission. Before you do so, there is a very good tax department at NYU, I'm told, that could assist you on some of these fundamental concepts.

Mike said...

Are there some companies that exploit the tax code to unseemly effect? Sure, but we are making it easier for them to do with a complex code, not more difficult. I am not suggesting changing the tax code as much as stripping it down to basics.

Looks like we are on the same page on this matter.

The gist is : Big companies employ big lawyers and big lobbyists. This is the fact in US and elsewhere.
It appears that the bigger the company, the bigger will be the amount of tax evasion. My guess is that there are very few exceptions to this.

What is the best way to change the status quo? Can we fire the lobbyists?

Aswath Damodaran said...

Thomas,
You clearly have strong views on this topic but I don't think that is an excuse to throw around words like "obfuscation". You accuse me of obfuscation because I compute the effective tax rate using the book income. That is actually how GAAP requires companies to compute the effective tax rate. So, I am actually following the standard practice. If your measure of the effective tax rate is used by any data service, I am not aware of it.

In fact, don't you think that a tax code that leads to massive differences between tax income and book income (and the differences have widened in the last two decades) is dysfunctional?

I will take your suggestions about writing to the NY Times and getting further tax education. However, I have also sent a full description of what I do and how I do it (my use of book income and taxes paid on the income statement) to staffers at the Congressional committees who contacted me after the story. Since they are the ones who ultimately will write the tax law, I feel that I have done my fair share to set the record straight.

Vinny said...

From my reading of the post, professor was just trying to somewhat ideologically question the complexity and obscurity embedded in the values that are represented in the financial statements.

How did this evolve into a debate of technicalities remains bewildering to me?

To set one fact out of the way, Professor's "Investment Valuation' clearly states that if international operations and their flow on effects are too big a concern for you, the best approximation that can be made to account for this is to use a weighted average of the revenues/tax rates. As for the algebric calculations of the tax rate (using 1-NI/Tax income or Tax payable/Taxable income), those are just complementary exercises in what you want to use as your base figure. How does this imply using a different methodology, I can't figure out!!1

Secondly, he also points out that even if in earlier years a R&D focused company or loss making company in initial years exhibits lower or nil effective tax rates, surely this can't be sustained going into the future (with regards to the company in question and not the sector as such). Yes, agreed that the mix of companies comprising the sector will change and new enterprises will emerge that act as replacements. But for valuation purposes I will reiterate what the Professor has advocated - Do devote attention to sector specific factors, but at least do not get blinded by 'the number' and always apply in the context of company in question.

Now for the real techy part, how you measure tax rates, there is one notion that carries a great element of truth - whatever approach you use, apply it consistently. So book income(highly accessible) is your most user friendly option.

But talking from IFRS perspective, companies do provide a reconciliation of taxable and accounting incomes in their notes to financial statements. Agreed that this just adds a layer of complexity to the calculation in terms of DTA's and DTL's and temperory differences in the recognition of revenues/expenses. So use and breaking down of such reconciliations is recommended with a heavy dose of caution.

For me he important question comes down to not what the effective tax rate is but why is it what it is and why is it different to MTR? Is this likely to be sustained into the future due to either the nature of company or corporate structuring in tax heavens.

In essences, arriving at the exact number to use is no straight forward exercise. But it is not necessary either. Approximation by book income and adjusting for it in future years in light of circumstances could do the job.

Thomas said...

Professor Damodaran,

Yes, I've got strong views on the subject and I don't think "obfuscation" was too strong a word, particularly since you continue to do it here.

If you even bothered to read my posts you would understand that I was making the very basic point that to determine "effective tax rate" one not only should but MUST compare book income with taxes accrued. This observation was started in the first place because of the very conflicting and confusing accounts you've used in describing how you came up with your numbers.

In the last iteration of that description (on your own blog, not the NYT) you stated:

"I compute the effective tax rate for a company by dividing its taxes paid by the taxable income; if the company is losing money and pays no taxes, I set its tax rate to zero".

To this I replied that it is non-sensical (and even practically impossible) to use "taxable income" to determine an "effective tax rate" because the whole point of the exercise is to determine the effect of the different method of determining income under the tax code has than if we simply determined tax to be paid by using book income:

"Of course, the need for the "effective tax rate" concept arises in the first place because of the differences between income computed for financial book purposes and income computed for tax purposes. To the extent that the latter is lower than the former, the effective tax rate goes down".

You are now trying to turn this around by suggesting I'm the one that got it wrong in the first place and not you. Sorry, but that's worse than obfuscation.

Thomas said...

And, yes, the very big differences that often occur between book and tax income is a sign of our dysfunctional system. Have I suggested otherwise? I would tend to think that US GAAP represents true economic income more often than income determined under the tax code, but anyone looking at this issue seriously also needs to understand that US GAAP isn't perfect either. It seems to be taken as gospel that US GAAP is the true measure of economic income, but of course that's fiction, too.

What ideally should happen is that our accounting standards should be reviewed and revised to better reflect economic reality and hopefully to acheive an internationally accepted norm, and then the tax code should be amended to work from book income with as few exceptions as possible.

To repeat "my measure" of determining an "effective tax rate" is NOT what you have tried to suggest. I've indicated from the start that the whole exercise is used to determine the effect of this delta between book and tax. What I'm advocating here is that this delta be reduced. Most, but not all, the required changes need to be made to the tax code.

Another thing. This debate has been formed in the press as one primarily among competing interests of various corporations and industries as they fight for their various "tax preferences". That certainly is true. However, an equally important aspect of the problem is use of the tax code by politicans to 1) grant favors through hidden spending; and 2) steer the economy in the direction desired. The divergence between book and tax income and the resulting effect on "effective tax rates" won't disappear unless the latter is attacked with equal vigor.

Blueberry1 said...

Hi Prof. Damodaran,

I have a couple questions on the data.

1. For the measure of income that goes into the effective rate, does that include income of foreign subsidiaries?

2. Do the data sets include both corporations and non-corporate firms?

Thanks!

--Seth H.

Aswath Damodaran said...

The data includes only public companies (Is that what you mean by corporate versus non-corporate) and the taxable income includes some but not all foreign subsidiary income. (It depends upon how the foreign subsidiary is structured.)

Mike said...

the taxable income includes some but not all foreign subsidiary income. (It depends upon how the foreign subsidiary is structured.)

Professor, if a company has sizable overseas income, it has every incentive to structure the foreign subsidiary so as to minimize the tax. ( example: The Corporate office in Cayman islands, subsidiary in Ireland, etc).
In your analysis, have you come across any examples of this?

Mike said...

Hi Prof,

Does your analysis consider these kinds of items? My opinion is that without this, your analysis is incomplete.

Do you have any models to estimate the total amount of tax avoided per year?

Aswath Damodaran said...

Mike,
You are right. The analysis is incomplete. If I were just looking at one company, this expanded analysis would be doable. Doing this for the entire market would require an army of analysts, poring over financials. (Bloomberg's number is an estimate. I will take it for its worth but there is no easy way to get a measure of this number). Having said that, we know the direction of the bias and which firms will be most affected:
a. Multinationals pay lower tax rates than my computations and especially so if they maintain global subsidiaries that are structured to avoid taxes.
b. Large companies (who are more likely to be able to afford these elaborate holding structures)pay less in tax rates than my computations.
c. Companies in sectors that have more global operations (technology, consumer products) pay less in taxes than I have estimated than companies in sectors that are primarily domestic (trucking, utilities).
However, all of these biases add to my basic message. The tax code has disparate effects on different companies and within the same company, on different investments. That is not healthy. The solution, though, in my view is not to raise the tax rate but to lower it and remove the bells and whistles that have been built in.

Mike said...

Hi Professor,

Yes, we are in agreement on all your points.

The solution, though, in my view is not to raise the tax rate but to lower it and remove the bells and whistles that have been built in.

What are the chances of that when the CEO of a multinational is an advisor to the US president?
(I am not naming names here).

You get what I am sayin?

This was the gist of my questions from day 1.

Aswath Damodaran said...

Mike,
I think the last paragraph captures my frustration at the process.

karthik said...

Prof

I guess you need to calculate the effective tax rate by including the impact of deferred tax/ liability. The deferred tax liability would account for difference between tax profits and book profits as queried by Thomas.

Another major factor to be considered is the impact of intercompany transactions or the effect of transfer pricing. This could be analyzed in greater detail to evidence that companies which have higher degree of intercompany transactions would report lower effective tax rate than other pure domestic players.

This loop hole could be plugged through these Transfer Pricing audits wherein substantial adjustments are made to the taxable income. For example in India the net adjustment made on account of transfer pricing disputes is around Rs 45,000 crore till date.

Thomas said...

Good point, Karthik. Much of the difference between tax and book income, and therefore the difference between the "effective tax rate" and the "statutory tax rate" has to do with timing differences. These differences are reversed over time. That's why it is important to use more than one year to evaluate "effective tax rates". Some of these timing differences need to be accounted for as "deferred tax liabilities" as you astutely point out, but others not. For example, the source of one of the largest discrepancies between the federal statutory tax rate of 35 percent and the "effective tax rate" has to do with the fact that foreign earnings are often subject to lower income tax than the prevailing US rate. When those earnings are brought back to the US in the form of dividends, the US statutory rate will apply, with a credit for any underlying foreign tax paid. But the applicable accounting rules do not require that a "deferred tax liability" be established for this since the eventuality that the earnings will be repatriated is too uncertain (most US corporations keep the bulk of their foreign subsidiary earnings offshore indefinitely). Perversely, it is precisely this rule that discourages US companies from repatriating their foreign earnings. This is a very significant hindrance to the effective allocation of corporate capital, an issue that should be of concern to Professor Damodaran, even if he seems to be largely unaware of the rules of the federal income tax code.

Aswath Damodaran said...

Karthik,
Good point but I think I already do this. The tax expense in the income statement includes both current and deferred taxes, with current taxes defined as follows:
CCurrent tax expense = taxes paid + changes in taxes payable+ change in tax reserve liabilities + stock option excess tax benefits + return to provision reconciliation
Reported tax expense = Current tax expense + Deferred taxes
Here are the reasons why the effective tax rate is different from the statutory or marginal rate:
Recurring items:
1. State and local taxes
2. Foreign taxes at a lower rate
3. R&D and other credits
4. Tax exempt income if any [Income from equity investments is taxed at 7% instead of 35%]

Non-recurring
1. Creation and reversal of valuation allowances
2. Creation and reversal of tax contingencies relating to permanent items
3. Non-deductible goodwill impairments

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