March 2009- Of the 365 days in a year, few cause as many sleepless nights as April 15. The weeks leading up to tax day are usually filled with stress, and the day after brings relief--for individuals.
Businesses, on the other hand, must deal with taxes year-round, as they play a large role in determining a company's bottom line, according to Elizabeth Nicolson, government relations director for AMT-The Association For Manufacturing Technology, McLean, Va.
"If you're a business, [taxes] are probably one of the biggest things you have to worry about because, at the end of the day, what you have in your pocket is ultimately dictated by Uncle Sam," she says.
Taxes also influence business decisions, such as whether a company will set up shop or invest in other countries. They're not the only factor, however, according to Rosanne Altshuler, co-director of the Urban-Brookings Tax Policy Center, Washington, D.C.
"In addition to labor costs, transportation, accessibility to local markets and other non-tax factors, what's also important are things like depreciation allowances, investment tax credits, tax holidays, the ability to undertake a lot of tax avoidance and tax planning--there are a lot of variables other than the corporate tax rate," she says. "But it's the case that the corporate tax rate is high, and a lot of other countries have been lowering their rates recently."
In 2008, the U.S. corporate tax rate was 39.5 percent, according to Deloitte & Touche, New York. Altshuler says the U.S. statutory tax rate is one of the highest among other members of the Organisation for Economic Co-operation and Development, Paris.
Additionally, U.S. multinational companies operate under a worldwide tax system--they are taxed by the United States on their global income, not just what they earn domestically. The United States is one of only a few countries that uses this system, says Altshuler, which can be a disadvantage.
"Say I'm a U.S. multinational, and I invest in Ireland, and let's ignore any tax incentives," she says. "My profits are going to be taxed at 12.5 percent in Ireland. But wait a minute, the United States is going to tax all of my profits, wherever I earn them. So even though I'm in Ireland, facing a 12.5 percent rate, I actually face the U.S. rate."
The foreign tax credit, however, prevents the double taxation of income earned abroad. With this provision, U.S. companies operating abroad don't have to pay the full U.S. rate on top of the host country's full rate.
Firms also have deferral, a provision whereby companies pay taxes on their earnings abroad only when they bring them back to the United States. Further, the U.S. effective tax rate (which takes into account all tax provisions) is lower than the statutory tax rate.
Altshuler says many U.S. companies favor the establishment of a territorial tax system, which would allow them to pay taxes just to the country in which they do business.
"Firms would like us to be territorial because they want to level the playing field," she says. "And there's been a lot of talk about territorial taxation, starting in 2005, when the Joint Committee on Taxation put out an options pamphlet to deal with the tax gap."
The near universality of lower corporate tax rates worldwide tends to put U.S. manufacturing companies at a disadvantage, according to Nicolson.
"Any companies that pay the corporate tax rate that export beyond our borders are competing with one arm tied behind their back," she says. "It all makes a difference in terms of competitiveness because whether you're competing against your neighbor, or you're competing against someone in Great Britain or Japan or China, a good chunk of what you face, in terms of expenses, is taxes from the United States."
She also says there is a movement to revamp the U.S. tax code and make it more competitive for businesses. Many in Washington, D.C., are shining a spotlight on the latter, according to Nicolson.
"Politicians already recognize that the manufacturing sector is probably the most beaten-up sector right now outside of financial services and that if this country is going to get strong again economically, it has to come from the bottom up, from the manufacturing base," she says. "With that recognition, I think there are probably going to be some reasonable proposals down the road, in terms of taxation, that are intended to help American-based businesses do well--or at least better than they are now." MM