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Why Alcoa’s Effective Tax Rate Increased In 2014

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Alcoa’s effective tax rate

In the previous section, we analyzed the special items in Alcoa’s (AA) financial results. Let’s explore why Alcoa’s effective tax rate increased in 2014. The effective tax rate for Alcoa in 4Q14 was 51%, and the effective tax rate for 2014 was even higher at 64%. Let’s explore why Alcoa’s tax rate differed significantly from the federal statuary tax rate of 35%.

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Tax rate changes

In 2011, one of Alcoa’s subsidiaries in Brazil applied to the Brazilian government for a tax holiday, which ended automatically in June 2014. As a result, the tax rate for this subsidy will decrease from 34% to 15%. Because of the lower tax rates, Alcoa had to write off certain deferred tax assets from its balance sheet, resulting in a discrete income tax charge in 2014.

Special items

When a company files its income statement, the “special items” category covers one-time events. Also known as extraordinary expenses, special items include discontinued operations, charges associated with restructuring, and other nonrecurring expenses.

Alcoa has several special items in its financial results. Federal tax authorities have different mechanisms for calculating a company’s tax liability, and special items may or may not be a permissible expense. According to Alcoa, its special items had little or no tax benefits associated with them, which led to a tax outflow for Alcoa. However, its operational tax rate was 31% in 2014. Alcoa expects a similar operational tax rate in 2015 as well.

Alcoa (AA) and Allegheny Technologies (ATI) are among the top holdings of the SPDR S&P Metals and Mining ETF (XME). XME also invests in mining stocks such as Rio Tinto (RIO) and BHP Billiton (BHP).

In the next section, we will analyze the other key takeaways from Alcoa’s 4Q14 results.

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