U.S. companies face the sixth- highest effective tax rate in the world, according to a study by PricewaterhouseCoopers LLP. The tax rate for the largest U.S. companies between 2006 and 2009 was 27.7 percent, compared with a non-U.S. average of 19.5 percent, according to the study released today. Companies based in Japan, Morocco, Italy, Indonesia and Germany faced higher tax rates. Excluding the U.S., companies based in industrialized countries had an average rate of 22.6 percent.
“Without effective business tax reform, we’re going to continue to slip behind competitors,” said John Engler, president of the Business Roundtable, an association of chief executives based in Washington that commissioned the study.
The report may help shape the debate over rewriting the U.S. tax code. President Barack Obama has asked Congress to lower the 35 percent corporate tax rate and remove tax credits and deductions to make up for the forgone revenue.
Business groups also want the U.S. to switch to a territorial tax system, which wouldn’t tax U.S. companies on profits they earn in other countries. The U.S. requires companies to pay the top corporate rate of 35 percent on profits earned outside the country, though it allows companies to defer taxation until they bring the profits home. Other countries, including Japan and the U.K., have recently switched to a territorial system.
Except for the U.S., all other major industrialized countries levy value-added taxes that help cover the cost of government and are used to hold down corporate tax rates.
“It intrigues me because that’s the other difference that counts for that German advantage,” said Engler, a former Republican governor of Michigan.
Engler said he and the CEOs he represents wouldn’t support a value-added tax on top of the current U.S. tax system and that he didn’t think one was politically feasible.
“Would there ever be support for a wholesale change?” he said. “That is an interesting question. Let’s just say we don’t have policy on that at the moment.”
The report doesn’t take into account accelerated depreciation and other timing incentives built into the U.S. tax system, and that makes the difference between the U.S. and other countries look bigger than it is, said Martin A. Sullivan, a contributing editor at Tax Analysts, a nonprofit organization in Falls Church, Virginia.
Not Much Difference
“Although it is contrary to the authors’ purpose, the study overall shows U.S. multinational tax burdens are not much different than tax burdens of multinationals in other major economies,” he said in an e-mail.
A March 31 report by the Congressional Research Service, using different methodology, found that the U.S. had an effective corporate tax rate of 27.1 percent in 2008. Other industrialized countries had an average 27.7 percent effective rate, using a weighted approach that adjusted for the size of the economy, and a 23.3 percent rate with an unweighted approach.
The Business Roundtable report excluded oil and gas companies, which often face higher taxes when they extract natural resources. It also excluded companies for years in which they had negative pretax income. The study included at least one year of data for 484 U.S. companies and 1,336 non-U.S. companies.
The study examined taxes as reported for book accounting purposes. That means it typically reflects tax obligations and benefits as companies accrue them, not as they are paid. It also doesn’t differentiate between taxes paid to governments in companies’ home countries and taxes paid to other governments.
Many of the countries with the lowest effective tax rates, including Hungary, Oman, Panama and Qatar, have much smaller economies and far fewer large companies than the U.S.