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enefits related to the favorable resolution of certain foreign tax matters.” 23 The tax settlement effects
in both 2006 and 2007 appear to be nonrecurring. In contrast, lower tax rates on foreign operations are
noticeably consistent, suggesting that PepsiCo‟s effective tax rate will continue to be lower than the
U.S. federal rate.
PepsiCo‟s 2005 effective tax rate was increased by 7.0% as a result of repatriating earnings under
the American Jobs Creation Act (AJCA)—congressional legislation that triggered many one-time
repatriations. Using the reconciliation from statutory to effective tax rates, we might estimate
PepsiCo‟s sustainable effective tax rate as 35% plus 1% for state income tax effects less 6.5% for
foreign tax effects, equaling 29.5%.
The PepsiCo disclosures provide one example of nonrecurring tax effects. Exhibit 3.18 provides a
sampling of other nonrecurring tax benefits and tax charges that were found in recent company tax
notes.
The tax benefits to Amazon.com result from utilizing loss carryforwards for which benefits had not
previously been recognized. Taxable losses in earlier periods produced the tax savings recognized in
2004. Because the likelihood of their realization was not sufficiently high, the potential tax savings of
the losses were not recognized in the income statements in the years in which these losses were
incurred. The subsequent realization of these benefits occurs when the operating and capital loss
carryforwards are used to shield operating earnings and capital gains, respectively, from taxation.
These benefits should be treated as nonrecurring in analyzing earnings performance for the year in
which the benefits are realized. In the case of Amazon.com, the tax benefit increased earnings by 65%
in 2004.
Exhibit 3.18 Examples of nonrecurring income tax charges and benefits.
Sources: Companies‟ annual reports. The year following each company name designates the annual
report from which the example was drawn.
Both Wyeth and First Solar reduced their effective tax rates as a result of benefits from research and
development tax credits. This feature of the tax law is designed to encourage R&D spending in areas
such as specific pharmaceuticals and alternative energy sources. As with all other tax credits,
continuation of this source of tax reduction requires that the provision continue to be part of the tax
law and that companies make the R&D expenditures necessary to earn future benefits.