As multinational companies consider facilities expansion strategies across the globe, particularly in developing markets, many factors ultimately influence their location decisions. In addition to labor costs, availability of skilled workers, raw materials supply, and regional growth potential, a myriad of regulatory and political issues also come into play. Further, with many countries vying for investment capital as well as tax revenue, companies must carefully monitor the evolving tax benefits of each market
Looking at the broader picture, PwC's 2012 tax rate benchmarking study highlights tax rate trends, based on input from nearly 325 companies across six industrial product (IP) sectors - aerospace and defense, chemicals, engineering and construction, industrial manufacturing, metals, and transportation and logistics. PwC found that tax rate volatility among global IP companies began to moderate in 2011, as the economic recovery continued to take hold. The improving economic environment, as well as a reduction in reported losses, drove an increase in the average three-year tax rate to 26.3 percent at year-end, up 0.7 percent from 25.6 percent in 2010.
As companies invest to strengthen their products and competitive positions, they may be finding more opportunities to pursue tax incentives that favorably impact tax rates. This is particularly notable for U.S.-based companies, given that the United States had the second-highest tax rate among OECD (Organization for Economic Co-operation and Development) countries in 2011. However, at the time of this article's writing, the United States had the highest tax burden among the OECD nations, surpassing Japan. Additionally, as companies increasingly expand into emerging markets, more of them may benefit from the lower tax rate policies, tax incentives, and various credits these countries offer to promote investment.
The Global Tax Picture
Taking a closer look, PwC evaluated average statutory and effective tax rates (ETR) for the past three years across 11 major markets: Canada, France, Germany, India, Japan, Korea, the Netherlands, Sweden, Switzerland, the United Kingdom, and the United States. The average statutory rate for these countries in 2011 was 29.4 percent, down from an average of nearly 30 percent in 2009. There was considerable rate variation between countries. For instance, the Swiss rate, at 21.2 percent, was nearly half of the tax rates in the United States and Japan.
On the other hand, the ETR for companies in the same 11 countries actually increased 0.2 percent over 2009. The ETR was highest for companies in Japan, at 35.3 percent, and lowest for companies based in South Korea, at 11.8 percent. However, many ETRs were lower than statutory rates, driven by the impact of foreign operations and tax incentives related to research and innovation. Companies that secured tax credits and incentives as well as tax holidays, in return for direct investment in select markets, ultimately paid lower tax rates.
Underlying tax structures naturally varied as well. For instance, the United States, India, and Korea have "worldwide" tax systems, whereby corporations are required to pay taxes on profits regardless of where they are earned. The other countries have a "territorial" tax system, where tax is paid on income earned in that country, and foreign-source dividends are totally or largely exempt from tax when remitted. The vast majority of OECD countries now follow territorial tax systems.
A number of factors ultimately determine a company's tax rate. These can be both structural and recurring, resulting from overseas operations and tax incentives, or items such as losses and tax reserve adjustments that may not necessarily occur every year. The most common factor is the impact that foreign operations can have on a company's tax exposure. As companies expand into emerging markets, and these countries broaden their tax benefit programs, the impact of this item may become even more prevalent.
Next: The Power of Tax Credits and Incentives Around the World