Converting Operating Taxes to Operating Cash Taxes  419
We treat the remaining adjustments in Exhibit 20.5 as nonoperating. These 
include one-time taxes related to the reduction in the U.S. tax rate, the disposi-
tion in Brazil, and repatriation of past earnings. Because they are nonoperat-
ing, they do not factor into the calculation of operating taxes and the operating 
tax rate in Exhibit 20.6.
On an aggregate basis, the three adjustments included in Exhibit 20.6 lower 
statutory taxes on EBITA by 1.4 percentage points in 2018. Multiplying this 
percentage by earnings before taxes gives us a negative adjustment of $160 
million, resulting in operating taxes of $4,451 million. Dividing the amount of 
operating taxes by EBITA of $21,957 million leads to an operating tax rate of 
20.3 percent in 2018, slightly below the statutory rate of 21 percent.
Converting Operating Taxes to Operating Cash Taxes
In the previous section, we estimated operating taxes on an accrual basis. 
For most companies, especially growing companies, the taxes reported on 
the income statement will not reflect the actual cash taxes paid, because of 
differences in accounting rules versus tax rules. For instance, tax rules allow 
for accelerated depreciation of physical assets, whereas financial accounting 
typically uses straight-line depreciation. With higher expenses and lower pre-
tax profits on its tax books, companies can significantly delay or perhaps even 
perpetually postpone paying accrual-based taxes. For companies that con-
sistently defer or prepay taxes, we recommend using cash-based operating 
taxes, which we call operating cash taxes. (In the case of low-growth compa-
nies, deferred-tax accounts may rise and fall unpredictably. If the operating 
EXHIBIT 20.6  Walmart: Operating Taxes
$ million
 
2016
2017
2018
Statutory tax rate
35.0%
33.8%
21.0%
× EBITA
22,764
20,437
21,957
= Statutory taxes on EBITA
7,967
6,908
4,611
U.S. state income taxes
1.7%
1.8%
3.3%
Income taxed outside the United States
(4.5%)
(6.3%)
(3.5%)
Federal tax credits
(0.6%)
(0.9%)
(1.2%)
Other operating taxes
(3.4%)
(5.4%)
(1.4%)
× Earnings before taxes (EBT)
20,497
15,123
11,460
= Other operating taxes
(697)
(817)
(160)
Operating taxes
7,271
6,091
4,451
Operating tax rate1
31.9%
29.8%
20.3%
1 Operating taxes divided by EBITA.

420  Taxes
cash tax rate is volatile, do not adjust for deferrals in order to benchmark his-
torical performance. Instead, use the operating tax rate on an accrual basis.)
To convert operating taxes to operating cash taxes, start with operating 
taxes and add the increase (or subtract the decrease) in operating-related de-
ferred-tax assets net of deferred-tax liabilities.3 Since deferred taxes on the 
balance sheet include both operating and nonoperating items, we need to sep-
arate them. To do this, search the notes for a detailed listing of deferred taxes.
Exhibit 20.7 presents the deferred-tax table for Walmart, found in note 9 of 
the company’s annual report. Deferred-tax assets (DTAs) are presented in the 
upper portion of the table. Walmart recognizes a valuation allowance against 
tax assets because some tax assets are unlikely to be realized. In the lower 
portion of the table are deferred-tax liabilities (DTLs). The table concludes by 
netting deferred-tax liabilities against deferred-tax assets.
Exhibit 20.8 reorganizes deferred-tax assets and liabilities into operating and 
nonoperating items. Walmart has four deferred-tax accounts related to opera-
tions: accrued liabilities, share-based compensation, accelerated depreciation, 
and inventory. One of these, accrued liabilities, includes things like member-
ship fees, which are collected from the customer upfront but recorded as income 
over the life of the membership. The government recognizes income when 
the cash is collected, but the accounting statements recognize income over 
3 Given the complexity of today’s deferred-tax accounting, adjusting taxes by the change in aggregate 
deferred taxes is insufficient for calculating free cash flow. For Coca-Cola in 2018, 85 percent of the 
increase in deferred tax assets was attributable to a restatement of their value due to an accounting 
change, rather than the actual prepayment of taxes.
EXHIBIT 20.7  Walmart: Deferred-Tax Assets and Liabilities
$ million
2017
2018
Deferred-tax assets
Loss and tax credit carryforwards
1,989
2,964
Accrued liabilities
2,482
2,135
Share-based compensation
217
245
Other
1,251
1,131
Total deferred-tax assets
5,939
6,475
Valuation allowances
(1,843)
(2,448)
Deferred-tax assets, net of allowances
4,096
4,027
Deferred-tax liabilities
Accelerated depreciation1
(3,954)
(4,175)
Acquired intangibles
(401)
(2,099)
Inventory
(1,153)
(1,354)
Other
(540)
(899)
Total deferred-tax liabilities
(6,048)
(8,527)
Deferred-tax assets, net of liabilities
(1,952)
(4,500)
1 Reported as property and equipment in the annual report.