What explains ServiceNow's tax expense volatility in 2023?


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ServiceNow's tax expense volatility in 2023 can be attributed to several factors:
- Revenue Growth and Profitability: ServiceNow has experienced significant revenue growth, with subscription revenues increasing by 25% year-over-year to $2,075 million in Q2 20231. This growth has contributed to the company's profitability, with a non-GAAP operating margin expanding by 330 basis points to 29.5%2. The increase in revenue and profitability can lead to fluctuations in tax expense as a percentage of revenue, depending on the tax rate applied to the taxable income.
- Geographical Expansion and Tax Rates: ServiceNow's global expansion and the presence in various countries with different tax regimes can lead to variability in tax expenses. The company's operations and revenue streams are not evenly distributed, and fluctuations in tax rates or tax compliance requirements in different jurisdictions can impact the overall tax expense.
- Investment in Research and Development: ServiceNow has been actively investing in research and development, which can affect the company's tax expense. Deductions related to research and development expenses can reduce the taxable income, thereby lowering the tax expense. The amount and timing of these deductions can vary, contributing to the volatility in tax expense.
- Financial Performance and Cash Flow: ServiceNow's strong financial performance is reflected in its cash and cash equivalents, which increased to $4.07 billion as of September 30, 20232. The company's cash flow management and the timing of tax payments can also influence the volatility of tax expense. For instance, if the company chooses to pay taxes in advance or arrear, it can affect the timing of tax expense recognition in a given period.
In conclusion, ServiceNow's tax expense volatility in 2023 is primarily due to the company's rapid growth, geographical expansion, investment in research and development, and strong financial performance. These factors collectively contribute to the variability in tax expense as a percentage of revenue.
Source:
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1.
ServiceNow Reports Second Quarter 2023 Financial Results
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