Comparing Corporate Tax Rates

Is the U.S. Number One?

September 2014

Thinking of starting or moving a business abroad? Wondering what the hype about corporate tax rates and inversion is all about?

Starting a business abroad can be attractive for many reasons, including lowering your tax burden. In today’s e-commerce world, many businesses have the freedom to start their operations anywhere in the world. The tax consequences are an important consideration that, when planned appropriately, can create substantial tax savings. Though it is not possible to foresee how laws and regulations may change in the future, comparing current tax rates can provide a valuable source of information when searching for the most tax-friendly locations.

If you are considering incorporating your business in an international location, the options to weigh are not much different than if you are considering which U.S. state would represent the best option to incorporate a domestic organization. For instance, Delaware’s quick corporate organization filing procedures and no state corporate tax make it a popular choice for new ventures to base their operations. However, public perception is not always so accepting of U.S. business owners moving their enterprises overseas; some view it as unpatriotic or akin to tax evasion. Of course many politicians stake their platform on changing regulations to keep more businesses at home, for example: “No Federal Contracts for Corporate Deserters Act of 2014.” However, under the current landscape, establishing a business abroad may make sense from a tax perspective.

One of the ways to move a business abroad is through inversion. Inversion is accomplished when an existing U.S. corporation merges with a foreign corporation to move their tax home abroad. The purpose of inversion is to avoid paying the US tax rate on non-U.S. foreign earnings. An inverted business is still liable for US taxes on income earned within the U.S. The U.S. is really the only industrialized country that subjects a corporation’s world-wide income to U.S. income tax. U.S. inversions are a very complex strategy. For more discussion, refer to What is a Corporate Inversion?

How does the U.S. stack up to other countries?

It’s no secret that the US has a high corporate tax rate, but just how high is it? Back in 2012, after Japan reduced its corporate tax rate to 35.64%, the U.S. corporate tax rate became the highest among OECD members at 40.0%. The top rate is based upon the statutory tax rate of 34% plus an average state rate of 9%, net of federal tax benefit for the state tax deduction. The top 5 industrialized countries with the lowest and highest rates are:

Lowest Percent Highest Percent
Ireland 12.5 United States 40.0
Poland 19.0 Japan 35.64
Hungary 19.0 Belgium 33.9
Czech Republic 19.0 France 33.3
United Kingdom 20.0 Australia 30.0

Even close to our U.S. borders in Canada, the corporate tax rate is reasonable. Depending upon the province, where the provincial tax rate can vary between 10% in Alberta to 16% in Nova Scotia, the average corporate tax rate is reasonable. In Ontario, where many Canadian businesses are located, the top tax rate is 26.5%.

It doesn’t take a calculator to see that the U.S. has the highest rate in the industrialized world. Of course, the tax rates above are presented at nominal rates and the U.S.’s expansive internal revenue code provides ample opportunities to lower a tax payer’s effective rate for selective industries and businesses.

What other factors should be considered?

While tax considerations may be of high importance, there may be other factors that help make your decision. Just as you would consider the quality of life or other culture factors in a decision regarding which country to live in, a nation’s tax rate should not be the only consideration when incorporating abroad. Fortunately there are some independent organizations that compile data and rank nations based on a variety of business-related factors.

The World Bank considers several factors when weighing which countries are the most business friendly. Their list of criteria include the procedures it takes to start a business, electricity costs, stipulations for trading across borders, ease of getting permits, acquiring credit, and finding reliable investors.

In the World Bank’s ranking of business friendly countries the U.S. ranks fourth overall and under the category of “ease of starting a business,” the U.S. is eleventh. There is on average 6 procedures to start a business, which takes an average of 5 days, and costs about $750 in the U.S. This compares to New Zealand in the number one spot with one procedure and $150. Although the U.S. is in general an attractive place to incorporate a new business, there are pitfalls that could make domestic incorporation a more time consuming one to initiate.

Forbes rates countries based on slightly different measures. For instance, they also consider a nation’s personal freedom, workforce education level, main language, and unemployment rates when comparing countries. When weighed against these factors, Forbes considered Ireland to be the most favorable place for new business ventures. Ireland happens to have a high unemployment rate, which is attractive for businesses looking to hire. On this scale Forbes rates the U.S. at 14th – largely due to ranking 51st on our tax burden.

Circling back to tax burdens, it’s not all about the rate when comparing taxes between countries. It’s also the complication of the tax code, availability of tax credits, and the amount of time it takes to comply with the laws. One major difference between countries is the depreciation deduction. Also, the taxability of foreign earned income is an area where the US is considered to be most stringent.

Is it worth it?

Only you can make that determination based on your company’s long term objectives. The decision of where to locate can be the most important decision in the success of a new or existing business. As we’ve discussed, there are a number of factors that come into play, but tax consequences have been a major topic of discussion in the news lately. Many pharmaceutical companies have considered going the route of inversion to lessen their tax burden and most recently Burger King believes there are benefits of merging with Tim Horton’s to become a Canadian corporation. This may be their best option, but many other corporations are willing to pay the U.S. price just to be where the action is for more opportunities.

If you would like to discuss this matter further, please contact Stuart Lyons at 1.800.244.7444.

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.

IRS CIRCULAR 230 DISCLOSURE:
Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachment) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any tax-related matter. Please contact us if you wish to have formal written advice on this matter.