There has been much intense discussion in recent weeks in the U.S. and around the world over corporate income tax rates, sparked in part by two recent events: (1) Japan recently lowered its corporate income tax rate, thus giving the U.S. the dubious honor of having the nominal highest corporate income tax rate in the world [See, for example, CCH’s Global Daily Tax News, April 3, 2012] and (2) U.S. president Obama recently released his corporate tax reform plans for reducing the U.S. corporate income tax rate and broadening the U.S. corporate tax base. The bloggers are out in full force in this U.S. Presidential election year, debating the role of corporate income tax rates in creating economic growth and jobs in the U.S. [See, for example, CCH Tax Briefing, February 24, “The President’s Framework for Business Tax Reform”] The corporate income tax rates that usually get the headlines are the so-called nominal or headline rates. So, for example, you read that the U.S. rate is currently 39.2% and Japan is now 38.01 %. You read of plans to lower the U.S. rate to 28%. However, in terms of tax incentives to encourage investment, it’s a bit more complicated than that. It is a company’s effective tax rate–not the nominal rate—and its cost of capital, which drives the quantitative component of investment decisions. Therefore, a company’s effective tax rate can be quite different than the nominal tax rate.
Let’s take the US and Japan as examples. The chart below gives you a little flavor for the complexity in the U.S. and Japan.
Effective Actual Corporate Tax Rates By Selected Industry 2007-2008 (Source: U.S. Treasury, Office of Tax Analysis)
|Wholesale and Retail Trade||31%|
|Transportation and Warehousing||19%|
Japan Corporate Tax Rates (Source: CCH World-wide Tax Rates and Answers)
|Resident Businesses at Federal Level||The headline corporate income tax rate for resident businesses for 2012/13 is 25.5%, plus 10% surtax.|
|Resident Businesses at Local Level||Two types of local taxes apply to resident businesses: enterprise tax and corporate inhabitant tax (prefectural and municipal). The standard rates are 5%-9.6%, and 17.3% of the corporate income tax payment (an effective rate of 5.19%), respectively.|
|Nonresident Businesses at Federal Level||The headline corporate income tax rate for permanent establishments of non-resident businesses for 2012/13 is 25.5%, plus 10% surtax.|
|Nonresident Businesses at Local Level||Two types of local taxes apply to permanent establishments of non-resident businesses: enterprise tax and corporate inhabitant tax (prefectural and municipal). The standard rates are 5%-9.6%, and 17.3% of the corporate income tax payment (an effective rate of 5.19%), respectively.|
|Resident Businesses Combined Federal and Local||The combined federal and local headline corporate income tax rates for resident businesses, using Tokyo as an example, for 2012/13 are 38.01%, including 10% surtax on the federal tax owed.|
|Elements of Income and Expense taxed at special or reduced rates||A reduced corporate income tax rate of 15%, plus a surplus tax of 10% (from April 1, 2012; 18% previously) applies to taxable income up to JPY8m for companies with capital of JPY100m or less, and also to certified special medical corporations.|
I think you get the idea. Although the nominal or headline rate for a country is a good starting point for analysis, the goal is to compute the effective rate—the actual rate that a company pays when it applies the appropriate tax rate (general or special rates in some cases) to the tax base—the taxable income after reduction by the deductions (both general and special) allowed to a particular company.
In future blogs, we will look more closely at this second number in the equation—a company’s specific tax base, as well as the role that taxes other than income taxes, e.g., withholding tax and VAT, play in making investment decisions around the world.