The Impact and Design of Business Taxation in a Globalised

World

London April 27, 2009

Kevin S. Markle and Douglas A. Shackelford University of North Carolina

Worldwide Corporate Income Taxes

April 27, 2009

U.S. Presidential debate, September 26, 2008

McCAIN:“Right now, American business pays the

second-highest business taxes in the world, 35 percent. Ireland pays 11 percent.

“Now, if you're a business person, and you can locate any place in the world, then, obviously, if you go to the country where it's 11 percent tax versus 35 percent, you're going to be able to create jobs, increase your business, make more investment, et cetera.

“I want to cut that business tax. I want to cut it so that businesses will remain in the United States of America and create jobs.”

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U.S. Presidential debate, September 26, 2008

OBAMA:

“Now, John mentioned the fact that business taxes on paper are high in this country, and he's absolutely right. Here's the problem: There are so many loopholes that have been written into the tax code, oftentimes with support of Senator McCain, that we actually see our businesses pay effectively one of the lowest tax rates in the world.”

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What Do We Do?

Estimate effective tax rates (ETRs) using financial statement information

Compare ETRs for domestics and multinationals

Compare ETRs across countries

Compare ETRs across years

Measure the impact of foreign subsidiaries on ETRs

5

What Do We Find?

6

Multinationals and domestic firms face similar ETRs.

Average ETR decline from 1988-2007 was 7 percentage points (20%).

Country ETR order remains constant over time.

Japan has the highest ETRs

U.S. and European countries have above-average ETRs.

Middle East, Tax Havens and Asian (ignoring Japan) countries have below-average ETRs.

Regression Equations

7

Three specifications:

Variables

Coefficients of Interest β0 = domestic ETR

(β0 + β1) = multinational ETR

ETR = book ETR (from the financial statements) Numerator is total tax expense (≥0)

Same conclusions using current income tax expense Denominator is NIBT (>0), robust to other income measures

Controls Industry (two-digit NAICS) Year Size – percentile rank of sales, assets, equity

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Countries

9

Sample: parents in 85 countries subs in 195 countriesBUT only know sub locations in

2008Countries Groups• Australia**• Canada• China• France• Germany • India• Japan• UK• US

• Asian Tigers• Tax Havens• Africa• Asia• Europe• Latin America• Middle East

2628

26 26

2223

27 27

2425

2324

-

5

10

15

20

25

30

2003-2007ETR from f/s

ESTIMATE ETR =Cur tax/NIBT

Manufacturing Low R&D 1988 - 2007ESTIMATE

UK Domestic UK Multinational

UK Tax Rates

2830

26 27

2123

3028

24 24 2426

-

5

10

15

20

25

30

2003-2007ETR from f/s

ESTIMATE ETR =Cur tax/NIBT

Manufacturing Low R&D 1988 - 2007ESTIMATE

US Domestic US Multinational

U.S. Tax Rates

-

5

10

15

20

25

30

35

40

MID

DL

E E

AS

T

TA

X H

AV

EN

S

AS

IAN

TIG

ER

S

CH

INA

AS

IA

CA

NA

DA

IND

IA

AU

ST

RA

LIA

LA

TIN

AM

ER

ICA

AF

RIC

A

UN

ITE

D K

ING

DO

M

UN

ITE

D S

TA

TE

S

FR

AN

CE

EU

RO

PE

GE

RM

AN

Y

JA

PA

N

2003-2007 ETR by Parent Country

Domestic Multinational

-

5

10

15

20

25

30

35

40

MID

DL

E E

AS

T

TA

X H

AV

EN

S

AS

IAN

TIG

ER

S

CH

INA

AS

IA

CA

NA

DA

IND

IA

AU

ST

RA

LIA

LA

TIN

AM

ER

ICA

AF

RIC

A

UN

ITE

D K

ING

DO

M

UN

ITE

D S

TA

TE

S

FR

AN

CE

EU

RO

PE

GE

RM

AN

Y

JAP

AN

ETR conditional on location of subs

-

10

20

30

40

50

601

98

8

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

JAPAN GERMANY AUSTRALIA

UNITED STATES UNITED KINGDOM FRANCE

EUROPE TAX HAVENS

Multinational Tax rates over Time

-

10

20

30

40

50

60

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

JAPAN dom

JAPAN mn

UK dom

UK mn

US dom

US mn

Multinational Gap over Time

Impact of Sub Location by Parent Country

(3.0)

(2.5)

(2.0)

(1.5)

(1.0)

(0.5)

-

0.5

1.0

1.5L

AT

AM

ER

ICA

US

TA

XH

AV

EN

S

AS

IA

TIG

ER

S

JA

PA

N

CH

INA

GE

RM

AN

Y

EU

RO

PE

UK

UK US EUROPE

Subs

Parents

Future Work--Clusters

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Companies appear to cluster among countries e.g., If anywhere in Europe, then in

Ireland, the Netherlands, and Switzerland?

Future work: How does this clustering affect our understanding of the taxes on multinationals?

What Do We Find?

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Multinationals and domestic firms face similar ETRs.

Average ETR decline from 1988-2007 was 7 percentage points (20%).

Country ETR order remains constant over time.

Japan has the highest ETRs

U.S. and European countries have above-average ETRs.

Middle East, Tax Havens and Asian (ignoring Japan) countries have below-average ETRs.

The Impact and Design of Business Taxation in a Globalised

World

London April 27, 2009

K. Markle and D. ShackelfordComments byJulian Alworth

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• Descriptive study: Provide a worldwide comparison of Effective Tax Rates measured from company financial statements

• Despite very significant changes in company tax rates over three decades country rankings have not changed significantly

• Differences in ETRs between purely domestic companies (operating in only one jurisdiction) and multinationals are generally much smaller than expected

• Other controlling factors (industry, size, assets etc.) do not affect the value of ETRs. Interpretation: cross-sectional (country) effects are the only factors of significance

• Companies with subsidiaries in tax haven countries have lower ETRs but the coefficient is modest

• Authors are cautious in drawing conclusions

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Sometimes difficulty following the language◦ Presumably always speaking of overall consolidated tax

expense of companies but sometimes authors refer to parent taxation

Multinational data: longer time series/ domestic data poor especially for European countries◦ Domestic companies: small samples relative to MNS in some

instances very few observations (France no data –Germany two years)

– Weakness of data should be stressed more in paper (appendix?) What are the authors expecting? Are the results

“reasonable” or do they comply with their expectations? What is the benchmark?

Useful to have a comparison with statutory rates and other measures of effective rates (Devereux et al. EMTR)

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Ranking of statutory / ETR similar◦ Is this expected?

ETR significantly lower than statutory rates◦ Is this expected?

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24

Statutory Rate Effective rate

Japan 40 1 42 1

United States 39 2 28 2

Germany 39 3 26 3

Canada 36 4 22 8

India 35 5 24 6

France 34 6 25 5

China 33 7 21 9

Australia 30 8 24 6

United Kingdom 30 8 26 3

25

26

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There are divergences between accounting and taxable income.

What are the source of these divergences?◦ Measurement problem ◦ Temporary vs. permanent differences◦ Shelters? ◦ Transfer pricing: surprising that data do not show

significantly lower ETRS for MNCs Testing equation for further work:

dependent variable ETR- Statutory Rate

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Germany: Multinational companies appear to have higher ETR than purely domestic companies◦ This contrasts with other studies which have

examined financial statement data◦ Weichenrieder on Germany (1996); Weichenireder

and Mintz (2009) show income shifting out of exemption country

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The Impact and Design of Business Taxation in a Globalised

World

London April 27, 2009