Locate the Notes to Financial Statements in Verizon’s latest annual reports (Form 10-K) that disclose the income tax information.
For comparison use Verizon’s competitor, AT&T.
Students who do not use the latest Form 10-Ks will receive a 10-pint deduction.
Write a short report (3 to 5 pages in MS Word) to discuss which company has the better tax planning strategies and is more successful is reducing tax costs while managing its overall tax risks. Include the following items:
Names and descriiptions of the businesses of the companies that you choose, and the year of the financial information that you are analyzing (5%)
Evaluate and compare the effective tax rate (based on GAAP and based on cash taxes paid, if the information of cash taxes paid is available). Discuss if there are any permanent tax differences that have affected their effective tax rates and the cause of these permanent differences. Comment on whether these permanent differences could be a result of successful tax planning (20%)
Discuss and compare the deferred tax assets and deferred tax liabilities of these companies. Analyze the source of these temporary differences and comment on whether these temporary differences could be a result of successful tax planning (20%)
Compare the level of risks that these two companies have taken on in its tax planning. Find if the companies have recorded any uncertain tax benefits (positions), the reason for these uncertain tax benefits (positions), and whether these is any change of the uncertain tax benefits (positions) recorded by these companies since last year. For example, compare the percentage of the amount of uncertain tax benefits (positions) to the amount of sales revenues, and the percentage of the amount of increase/decrease of uncertain tax benefits (positions) to the amount of sales. Which company recorded a larger percentage of uncertain tax benefits (positions), and which company recorded a larger increase of percentage of uncertain tax benefits (positions)? (15%) Do you think a larger percentage of uncertain tax benefits (positions) represents a higher tax risk that this company is facing? Why? If these companies do not have or do not disclose their uncertain tax benefits (positions), then please describe so in the report (10%) [Note: for most companies, the term “uncertain tax benefits” and “uncertain tax positions” mean the same thing.] (10%)
In your opinion, which company is better at minimizing its tax costs? Why? (20%)
Please write a report in a Word document. The report should be structured and free from grammatical errors. Please include tables to display the components of the items of deferred tax assets, deferred tax liabilities, the uncertain tax benefits, and the reconciliation of the effective tax rate. Your computations should be supported with the numbers disclosed by the company. You may choose to use MS Excel for your computation. If so, please copy and paste your computations from the Excel file into the report to support your reasoning. (10%)
Notes:
Pre-tax income is income before income taxes.
Income tax expenses are also called “provision for income taxes.” This account can also be found at the Income Statement or Statement of Operations.
Uncertain tax benefits (or uncertain tax positions, unrecognized tax benefits, Tax Contingencies) represent the liability related to aggressive tax planning. Uncertain tax benefits are listed in the Income Tax footnote in Notes to Financial Statements. Companies are required to disclose a table listing the change of uncertain tax benefits as well as a narrative disclosure of the reasons these liabilities are recorded. In the table, there is a balance at end of the year. This is the amount you will need for item 4 calculations.
Cash taxes paid, or cash paid for income taxes, can be found in the Statement of Cash Flows. Typically this number is in the supplemental cash flow information in the Statement of Cash Flows.
