Tom Bertino, Strategic Relocation & Expansion Services Practice, KPMG LLP (Apr/May 07)
Indeed, it is no wonder that the corporate tax rate has become one of the top-three factors in the site selection process, especially when one considers the myriad of federal and state income/franchise taxes, property taxes, payroll taxes, sales/use taxes, and other state and local taxes imposed upon corporate taxpayers today. While the corporate tax rate is only one component among many other factors in deciding if or where to expand or relocate to, it is significant that the corporate tax rate factor moved from sixth place in the 2005 survey to third place in the 2006 survey. We believe this shift resulted from businesses taking greater notice of this factor due to expansions in their business operations that have resulted in increased profits, and thus increased tax, over prior years.
Most businesses will be faced with a decision to expand or relocate within the United States or in a foreign location at some point in their business' growth, and that decision can be made for a variety of reasons. For some companies with labor-intensive products, locating a manufacturing facility in a location with low labor costs may enable them to be more competitive. Other companies may find it economical to locate in a place that provides a source for the raw materials they rely on, while others look for a location that can serve as both a base to serve a local market and to export to nearby markets.
Clearly, the corporate tax rate should be looked at very closely when companies compare locations in the United States for expansion or relocation, or when evaluating whether to move offshore.
The U.S. federal corporate statutory tax rate for most corporate taxpayers is 35 percent of taxable income, regardless of where a company is located within the United States. All corporate taxpayers should recognize the federal statutory tax rate and work within the Internal Revenue Code to manage their effective tax rate - the true tax rate after taking into consideration all tax adjustments (plus and minus) to income and the effect of credits, incentives, and other tax benefits. State and local statutory tax rates, on the other hand, will range from 1 percent to 12 percent.
Deciding whether to relocate or expand a manufacturing, warehouse, or other facility in one state or another requires an analysis of other principles of state and local corporate taxation beyond the statutory tax rate in order to determine the true tax costs for doing business in a particular state. Once a corporate taxpayer decides to place tangible personal property or acquire real property in a state, it will be subject to that state's income and/or franchise tax laws. The true effective tax rate, however, will depend upon how much of the business' income will be subject to tax in that state.
States are allowed to tax no more income than constitutionally permitted to be taxed. Taxable income in most states commences with federal taxable income, with state-specific modifications that add or subtract certain items from the federal taxable base, such as depreciation, interest income, net operating losses, and state taxes, to mention a few.
In addition, corporate taxpayers that commence operations in another state or states could potentially become taxable in more than one state. The question then becomes - how much income will be subject to tax by each of the states in which operations are conducted? A corporation that is taxable in more than one state has the constitutional right to have its income fairly apportioned among the states, and should not have to subject more than 100 percent of its income to the collective taxing body of states.
Accordingly, states have adopted apportionment principles to provide formulas to corporations for dividing their taxable income among all states in which a company has operations. These formulas are based on a weighted ratio of business activity within a state, which in most states consists of the property, payroll, and sales present in each state. Some states modify this formula to double weight sales, establish only single sales factors, or other such variations. Thus, apportionment may not provide a uniform division of a corporation's income among the taxing states because each state is free to choose the type of formula used to measure the corporation's business activity, resulting in some corporation's apportionment factors adding to more than 100 percent.
Companies looking to expand or relocate within the United States should, therefore, thoroughly review these state tax principles and look for states that are considered low tax states, no tax states, or states that have favorable apportionment principles. For example, locating a significant facility in terms of property and payroll in a state that uses a single sales factor method of apportioning income is particularly beneficial.
large American companies know that it is imperative to continuously
develop new products that are better and cheaper, and to continue to
expand markets for their products outside the United States. Even
smaller companies now look beyond the United States to market their
products, while at the same time trying to expand the domestic market
for their products.
Establishing an international operation can
involve the relatively straightforward process of locating and hiring
just one foreign distributor for a corporation's products in just one
country, or it can involve complex issues ranging from site selection
for foreign manufacturing to establishing a global distribution
network. At either end of the spectrum, there are complex tax and
non-tax issues that need to be addressed.
U.S. businesses might
say that doing business in the United States is costly through a tax
perspective; however, simply establishing foreign operations is not
without tax costs. It is true that there might be certain foreign
jurisdictions that impose little or no income tax; or the foreign
jurisdiction might have tax treaties available to reduce the tax effect
of foreign business operations; or the United States may allow credits
or other mechanisms to avoid double taxation of the same income.
However, income that is attributable to the conduct of a trade or
business within the foreign jurisdiction is typically subject to net
income taxation by that jurisdiction. In addition, the United States
taxes U.S. corporations on their worldwide income.
One of the
biggest mistakes a company can make in the relocation or expansion
process is to ignore the tax consequences of a move. Tax issues should
be addressed at the very beginning of the relocation decision-making
process in order to have the most significant impact on the bottom line.
Bertino is a senior manager in the Strategic Relocation & Expansion
Services practice of KPMG LLP. He is based in Costa Mesa, California.
KPMG LLP, the audit, tax, and advisory firm (www.us.kpmg.com),
is the U.S. member firm of KPMG International. The views and opinions
expressed herein are those of the authors and do not necessarily
represent the views and opinions of KPMG LLP. The information contained
herein is of a general nature and is not intended to address the
circumstances of any particular individual or entity.