Estimating Operating Taxes  417 For TaxCo, operating adjustments equal $110 million. Subtracting $110 million from $700 million produces operating taxes of $590 million.1 While this method is effective, it is only an estimate. In our example, the calculation of $590 million using public reports does not match the internal results of $600 million generated in Exhibit 20.2. The difference is explained by the $100 million in gains that were taxed at 15 percent, not at the statutory rate of 25 percent. Had gains been taxed at 25 percent, the methodology in Exhibit 20.3 would have estimated operating taxes without error. Without access to internal financial statements, however, our analysis is limited. If a company denotes the tax reconciliation table in its home currency, the process for calculating operating taxes follows the same principles, but differs slightly in implementation. The left side of Exhibit 20.4 presents the tax rec- onciliation table for TaxCo in millions of dollars. The first line item represents what the company would pay if pretax profit were taxed at the statutory tax rate. Often the company’s statutory tax rate is reported in the text accompa- nying the table. However, if it is not, divide the line item by pretax profit to estimate the statutory tax rate. With the statutory tax rate in hand, multiply EBITA by the statutory tax rate to determine statutory taxes on EBITA (see the right side of Exhibit 20.4). Next, work through the tax table for other operating adjustments. Since op- erating adjustments are already denoted in dollars, they can be transferred directly to the calculation of operating taxes. The process may vary, but our estimate of operating taxes remains unchanged. 1 To estimate operating taxes, some professionals add the percentage-based operating adjustments di- rectly to the statutory tax rate. While this method works in simple situations, it is not reliable. When a company has a large nonoperating expense such as an asset write-off, this will depress pretax profit, causing the percentage-based tax reconciliation items to spike. These spikes make historical analysis challenging and forecasting unreliable. As a result, we recommend adjusting statutory taxes using currency-based adjustments. EXHIBIT 20.4  TaxCo: Operating Taxes Using a Tax Table Reported in Dollars $ million Tax reconciliation table Operating taxes Pretax profits at the statutory rate 475   Pretax profits at the statutory rate 475 Foreign-income adjustment (70)   / Pretax profit 1,900 R&D tax credits (40)   = Statutory tax rate on EBITA 25.0% Resolution of tax dispute (24) Income taxes 341 × EBITA 2,800 = Statutory taxes on EBITA 700 Foreign-income adjustment (70) R&D tax credit (40) Estimated operating taxes 590 418  Taxes Operating Taxes at Walmart  To provide a real-world example, Exhibit 20.5 presents the tax reconciliation table for the discount retailer Walmart. In its tax reconciliation table, Walmart expresses its adjustments to the statutory tax rate as percentages. As is the case for all American companies during this pe- riod, Walmart’s tax reconciliation table includes several adjustments related to recent tax law changes in the United States. The 2017 Tax Cuts and Jobs Act (TCJA) reduced the U.S. corporate income tax rate from 35 percent to 21 percent in 2018.2 Since Walmart ends its fiscal year on January 31 of the follow- ing year, the 2017 fiscal year includes one month of profit at the new tax rate. In Exhibit 20.6, we use the tax reconciliation table to estimate operating taxes for Walmart using the process described earlier in this section. We do not present the company’s income statement but use EBITA and pretax profit as needed. The following paragraphs detail these steps. To begin, multiply the statutory tax rate by EBITA. In 2018, for example, statutory taxes on EBITA equaled $4,611 million for Walmart. Next, adjust statu- tory taxes for other operating items. The first two operating adjustments in this step are state and foreign income taxes. While we could have netted these two percentages directly against the statutory rate for simplicity, we instead con- vert them to dollar amounts, using pretax profit. We do this because the 2018 write-off of Brazilian operations depressed pretax profit, causing the adjust- ment for state taxes to spike in percentage terms (see Exhibit 20.5). We also treat federal tax credits as operating. While Walmart does not disclose the nature of these credits, they appear with consistency, so we consider them ongoing. EXHIBIT 20.5  Walmart: Tax Reconciliation Table % 2016 2017 2018 U.S. statutory tax rate1 35.0 33.8 21.0 U.S. state income taxes 1.7 1.8 3.3 Impact of 2017 tax act   One-time transition tax — 12.3 3.6   Deferred tax effects — (14.1) (0.7) Income taxed outside the United States (4.5) (6.3) (3.5) Disposition of Walmart Brazil — — 6.7 Valuation allowance — 2.1 6.4 Repatriated international earnings (1.0) (0.1) 0.8 Federal tax credits (0.6) (0.9) (1.2) Other, net (0.3) 1.8 1.0 Effective income tax rate 30.3 30.4 37.4 1 Walmart ends its fiscal year on January 31. Therefore, 2017 includes 11 months at a 35% statutory tax rate and 1 month at 21%. 2 The TCJA includes many changes to U.S. corporate tax law. Some deductions, such as the domestic production activities deduction (known as DPAD), were eliminated. New minimum tax thresholds, such as the global intangible low-tax income (GILTI), were introduced.