In an election season where the mere mention of taxes sparks debate from all political camps, much of the dialogue has been focused on corporate tax rates impacting U.S. businesses. In examining recent developments in domestic and foreign corporate tax rates, CCH, a Wolters Kluwer business and a leading global provider of tax, accounting and audit information, software and services, has taken a closer look at two key corporate tax figures that can dramatically impact the bottom line – the nominal tax rate compared to the effective tax rate.
“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,” said Jerry Nestor, Managing Editor for CCH Publishing and contributor to the CCH Integrator Blog, a regularly updated source of global tax topics and issues. “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.”
Corporate Tax Rates: United States and Japan
Japan recently lowered its corporate income tax rate, which moved the United States to the top of the global list of the highest nominal corporate income tax rates in the world. But earlier this year, President Obama released his corporate tax reform plans for reducing the U.S. corporate income tax rate and broadening the U.S. corporate tax base (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 nominal rates, but that’s only part of the story. Investors who see Japan’s new rate is at 38.01 percent and that the President’s plan proposes lowering the U.S. rate from 39.2 percent to 28 percent need to do some further research beyond the nominal/headline rate figures. In terms of tax incentives encouraging investment, more emphasis should be placed on a company’s effective tax rate – which can be quite different than its nominal/headline rate.
In looking at the United States and Japan as examples, the charts below provide some background on the tax complexity in each country.
Effective Actual Corporate Tax Rates By Selected Industry 2007-2008
(Source: U.S. Treasury, Office of Tax Analysis)
Wholesale and Retail Trade
Transportation and Warehousing
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.
Depending on the type of industry and location, the effective tax rate, which encompasses a company’s specific tax base and taxes other than income taxes, can paint a clearer picture on an investment decision than the nominal/headline rate.