GLOBAL ACCOUNTING AND CONTROL: A MANAGERIAL EMPHASIS

GLOBAL ACCOUNTING AND CONTROL: A MANAGERIAL EMPHASIS • Sidney J. Gray, University of New South Wales • Stephen B. Salter, University of Cincinnati • Lee H. Radebaugh, Brigham Young University Gray, Salter & Radebaugh Chapter 6

CHAPTER SIX TAXATION AND THE MULTINATIONAL ENTERPRISE Gray, Salter & Radebaugh Chapter 6

INTRODUCTION • Challenges to the MNE in terms of taxation of its global operation: • Variety of taxes and types of taxable income. • Home govts. want to tax global income. • Key taxes for MNEs: • Direct taxes, e.g., corporate income taxes • Indirect taxes, e.g., Value Added Tax. Gray, Salter & Radebaugh Chapter 6

DIRECT TAXES KPMG Corporate Tax Rate Survey Statutory Corporate Tax Rates All 86 Countries 1993-2006 Gray, Salter & Radebaugh Chapter 6

DIRECT TAXES Statutory Corporate Tax Rates by Global Region 2006 Gray, Salter & Radebaugh Chapter 6

DIRECT TAXES Statutory Corporate Tax Rates EU 1993-2006 Gray, Salter & Radebaugh Chapter 6

DIRECT TAXES Average Corporate Tax Rates EU 2000-2006 Gray, Salter & Radebaugh Chapter 6

DIRECT TAXES Statutory Corporate Tax Rates EU 2000-2006 Gray, Salter & Radebaugh Chapter 6

DIRECT TAXES Statutory Corporate Tax Rates Comparison OECD 2000-2006 Gray, Salter & Radebaugh Chapter 6

DIRECT TAXES Statutory Corporate Tax Rates Comparison G7 1993-2006 Gray, Salter & Radebaugh Chapter 6

DIRECT TAXES Statutory Corporate Tax Rates Comparison by Global Region Gray, Salter & Radebaugh Chapter 6

Direct TaxesDecline in Statutory Corporate Tax Rates 1993-2006 • Consistent and dramatic reduction worldwide in corporate tax rates over last 14 years • Reductions began in UK in mid-1980s when government of Margaret Thatcher lowered corporate tax rate from 52% to 35% between 1982 and 1986 forcing other countries to follow suit. • In past 14 years, average corporate tax rates of countries in KPMG Survey declined 28.7% dropping from an average of 38% to 27.1%. • Worldwide competition between trading blocs such as ASPAC nations, Group of 7, OECD, and EU has had impact on corporate tax rates Gray, Salter & Radebaugh Chapter 6

Direct TaxesDecline in Statutory Corporate Tax Rates 1993-2006 • Has been clear impact on EU tax rates from 10 new countries that joined EU in 2004. • In 1993, when EU comprised 15 nations, average corporate tax rate was 38%. • By 2006, when EU comprised 25 nations, rates dropped 12.2 percentage points to 25.8%, a decline of 32%. • With average corporate tax of 18.4%, Eastern European states that joined EU in 2004 have among lowest tax rates in Europe. • Among major nations in EU, Germany slashed its corporate tax rates from 59.7% in 1993 to 38.3% in 2001, a decline of nearly 36%. • The German government recently decided to reduce its corporate tax rate from 38.34% to about 29% beginning January 1, 2008. • With reduction, Germany will move from highest tax rate to a rate that is in line with other countries in Western Europe Gray, Salter & Radebaugh Chapter 6

Corporate Statutory Tax Rates Around the World Gray, Salter & Radebaugh Chapter 6

DIRECT TAXESCorporate Income Tax • Key questions: • what income is taxable? • what expenses are deductible? • what additional taxes will be charged when dividends are paid. Gray, Salter & Radebaugh Chapter 6

DIRECT TAXESWhat Income is Taxable? Two approaches to taxation of foreign source income: • Territorial approach, e.g., Hong Kong. Only income earned in Hong Kong should be taxed there. • Worldwide approach, e.g., U.S.. Taxes both domestic and foreign source income. Can lead to double taxation but this can be minimized through tax credits and tax treaties. Gray, Salter & Radebaugh Chapter 6

DIRECT TAXESDetermination of Expenses • The way expenses are treated for tax purposes, can cause differences in tax paid Gray, Salter & Radebaugh Chapter 6

DIRECT TAXESWithholding Tax and Taxing Dividends • The income earned by a foreign subsidiary is taxable in a foreign country when cash is returned to the parent through: • dividends, • royalties • interest on intra company debt, • When cash is returned to parent withholding taxes are often deducted. Gray, Salter & Radebaugh Chapter 6

DIRECT TAXESWithholding Tax and Taxing Dividends There are two approaches to taxing corporate income: • Classic System: e.g., US • income is taxed when the corporation earns it and when dividends are received by the shareholders. • Integrated System: • tries to eliminate double taxation. Gray, Salter & Radebaugh Chapter 6

DIRECT TAXESStatutory vs. Effective Tax Rate Differences in treatment of income and expenses can result in differences between statutory tax rates and effective tax rates. Gray, Salter & Radebaugh Chapter 6

DIRECT TAXESStatutory vs. Effective Tax Rate Statutory Total Taxes Paid Tax = --------------------------------------- Rate Taxable Income based on Tax Laws Effective Total Taxes Paid Tax = -------------------------------- Rate Net Income before Taxes based on Accounting Rules Gray, Salter & Radebaugh Chapter 6

Statutory Tax Rates (STR)vs Effective Tax Rates (ETR)EU Member States (1990-1996) Gray, Salter & Radebaugh Chapter 6

Corporate Effective Tax Rates Around the World - 2005 Gray, Salter & Radebaugh Chapter 6

AVOIDANCE OF DOUBLE TAXATION OF FOREIGN SOURCE INCOME Credits and Deductions: • When subsidiaries are based in a country which uses a worldwide approach to taxation, income may be taxed twice: • when earnings are realized in the foreign location • when earnings are realized in the parent country. • This is double taxation Gray, Salter & Radebaugh Chapter 6

AVOIDANCE OF DOUBLE TAXATION OF FOREIGN SOURCE INCOME • For income earned outside the country, most developed countries offer credits to offset the foreign tax paid • In the US, taxes paid on foreign income: • can be treated as a credit applied against tax liability • can be deducted from income to reduce taxable income. Gray, Salter & Radebaugh Chapter 6

AVOIDANCE OF DOUBLE TAXATION OF FOREIGN SOURCE INCOME- Table 3 Gray, Salter & Radebaugh Chapter 6

AVOIDANCE OF DOUBLE TAXATION OF FOREIGN SOURCE INCOME Foreign Tax Credit (FTC) Limitation • Corporation's FTC is equal to the percentage of its US tax laibility that results from its foreign source taxable income being included in its total US taxable income • Amount of FTC = US taxes before FTC times (taxable income from foreign sources/total worldwide taxable income) • Amount of FTC cannot exceed amount of foreign taxes paid during year Gray, Salter & Radebaugh Chapter 6

AVOIDANCE OF DOUBLE TAXATION OF FOREIGN SOURCE INCOME • Tax Treaties: • can specify that certain classes of income would not be taxable; • can reduce the rate on income and/or withholding taxes; • can specifically deal with the issue of tax credits Gray, Salter & Radebaugh Chapter 6

MINIMIZING GLOBAL TAXTax Havens • Is a “place where foreigners may receive income or own assets without paying high rates of tax.” • can offer low taxes or no taxes on certain classes of income Gray, Salter & Radebaugh Chapter 6

MINIMIZING GLOBAL TAXTax Havens • Examples of tax havens: • No Income Taxes - Bahamas, Bermuda, Cayman Islands. • Low Tax Rates - British Virgin Islands • Exempt foreign source income - Panama, Hong Kong. Gray, Salter & Radebaugh Chapter 6

MINIMIZING GLOBAL TAXTax Incentives There are two major types of tax incentives. • tax holidays • given by countries to attract foreign investors • export incentives • given by countries to encourage exports of goods and services Gray, Salter & Radebaugh Chapter 6

INDIRECT TAXESValue Added, Goods and Services Tax • Examples of indirect taxes: • consumption taxes (sales tax), • VAT, • excise tax, • estate tax, • gift tax, • employment tax, • user fees. • In Europe, VAT is a considerable source of revenue. • tax applied at each stage of production for the value added to the goods. • tax burden eventually falls on the consumer because companies can reclaim taxes paid. Gray, Salter & Radebaugh Chapter 6

INDIRECT TAXESValue Added, Goods and Services Tax- Table 6.2 Gray, Salter & Radebaugh Chapter 6

Indirect Tax Rates Around the World Gray, Salter & Radebaugh Chapter 6

TAX DIMENSIONS OF EXPATRIATES • Most countries tax earnings of their residents. • The US taxes the worldwide income of its citizens. • The US does provide some relief if you have been resident outside the US for a certain uninterrupted period. Gray, Salter & Radebaugh Chapter 6

GLOBAL ACCOUNTING AND CONTROL: A MANAGERIAL EMPHASIS