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The Rising Importance of Tax and Incentives Considerations

Today's bad economic news has heightened companies' awareness of avoiding high tax locations and maximizing incentives when conducting site searches.

Woody Hydrick, Senior Principal, Global Location Strategies and Andy Mace, Managing Director, Global Business Consulting , Cushman & Wakefield Business Consulting  (Feb/Mar 09)
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Global Comparisons
The rise in the importance ranking of corporate tax rates is particularly intriguing and also indicative of overall changes we have been witnessing in investment projects for manufacturing operations with global search areas. In the United States, state corporate income tax rates can exceed 9 percent, in addition to a top federal rate of about 35 percent, for a total levy nearing half of gross income prior to any deductions. The average U.S. statutory tax rate is one of the highest among the nations comprising the world's largest economies and competing for foreign direct investment, including Canada (19.5 percent federal), China (25 percent), and Germany (30 to 33 percent effective). When the U.S. tax rates are compared to those of countries renowned for their aggressive business attraction programs - such as Ireland (12.5 percent), Switzerland (as low as 6.6 percent), and Singapore (18 percent) - the difference is startling.

As an example, we recently assisted a pharmaceutical company with a worldwide search for a new, multimillion-dollar manufacturing facility. During this assignment, the very first screen applied to the search region was the identification of nations with elevated business income taxes. The effect of applying this criterion was the elimination of several nations recognized for the strength of their pharmaceutical industry clusters including the United States, Canada, and Japan, among others.

When domestic companies with global manufacturing operations combine U.S. tax rates with aggressive valuation of the goods produced, many are forced to seek protection for income generated by offshore operations by a variety of methods up to avoiding repatriation. Some corporations naturally decide to invest in new production operations outside the United States. Similar considerations and realities also prevent international companies from deploying manufacturing investments within the United States. For companies seeking to install production capacity in the United States for market access or other reasons, the variance in tax rates among the states (from 0 to almost 10 percent) is enough to make the tax a consideration very early in the site-search process. Even with federal and state tax reductions or incentives for certain investment or operating activities, the U.S. system remains complex and cumbersome at a time when the competition for major capital investment projects is increasingly global. As a result, we anticipate the weighting of this factor will remain high and/or rise in future surveys.

Area Development's 2008 survey responses were received prior to the fourth quarter of last year, and therefore do not reflect the continued economic downturn of 2008's final three months in the United States and abroad. If the gloomy projections for the global economy through 2009 hold true, we expect that next year's survey results will further tilt toward emphasis on incentives and financial considerations. And yet, we harbor hope that we are not too far removed from a period of renewed economic growth and increased employment, when "labor availability" and other growth-oriented requirements top the list of site selection factors.    


Woody Hydrick can be reached at woody.hydrick@cushwake.com; Andy Mace can be reached at andy.mace@cushwake.com.
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