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Business Incentives Help to Offset Increases in Effective Tax Rate

Average effective tax rates (ETRs) in the United States increased steadily from 2010 to 2012, adding to the burden of U.S. companies already saddled with the highest corporate tax rate among advanced nations; however, incentives provide some measure of relief.

July 2013
A recent report from PricewaterhouseCoopers — Assessing Tax: 2013 Tax Rate Benchmarking Study for Industrial Products and Automotive Sectors — reveals a steady upward trend in average effective tax rates (ETR) in the aerospace and defense, automotive, chemicals, engineering and construction, industrial manufacturing and metals, and transportation and logistics sectors. The ETR rose from 26.1 percent in 2010 to 28.3 percent in 2012, despite a worldwide reduction in statutory rates of corporate income tax.

With a combined statutory corporate tax rate of 39.1 percent, the United States had the highest corporate tax rate among advanced nations in 2012, 50 percent above the 25 percent average statutory corporate tax rate of other countries. While the average rate in the rest of the developed countries declined by 19 percentage points between 1988 and 2012, the U.S. rate rose slightly over this same period.

An improved business climate and decrease in companies reporting losses are responsible, in part, for the rise in the ETR, according to the report. “We have witnessed a steady increase in the global ETRs across the industrial products sector, as the recovery gains ground and companies continue to demonstrate improved profitability,” said Michael W. Burak, U.S. and global industrial products tax leader for PwC. “At the same time, we are seeing a consistently healthy level of investment spending, as companies seek to strengthen their competitive positions, while securing tax incentives that favorably impact ETRs compared to statutory rates.”

In the aerospace and defense sector, there was a three-point increase in the ETR from 2010 (26.5 percent) to 2012 (29.3 percent). However, the report notes that tax incentives had a 4.1 percent favorable impact on the ETR. Similarly, tax incentives helped to lower the ETR in the automotive sector (by 1.4 percent).

“In a nation with the highest corporate tax rate among the industrialized world, and labor wage rates far above China and other emerging economies, economic development incentives are a fact of life if regions, states, and the United States want to compete in a global economy,” said David J. Robinson, The Montrose Group, LLC in a recent Area Development article.

Additionally, foreign operations also have a favorable impact on ETRs because tax differentials on foreign earnings lower companies’ tax liabilities. In the automotive industry, which has many foreign operations, this has resulted in a 4.2 percent benefit.

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