The recent exodus of U.S. companies fleeing the country to lower their tax bill has a lot of people wondering: Are corporations paying their fair share of taxes?
That depends on where you live—and whom you talk to.
As the developed world becomes more tightly knit, corporate taxes are going to play an increasingly important role in the competition for global market share, according to Kyle Pomerleau, an economist at the Tax Foundation, a pro-business tax research group.
Rising wages in many industrial countries mean companies are looking more closely at countries with favorable tax rates.
“As countries converge, the tax codes are going to become more and more important,” he said.
As in the U.S., those tax codes are the subject of an ongoing public debate over national tax policies. To gain a competitive edge, about half of the 183 countries surveyed by accounting firm PWC have cut their official “statutory” corporate tax rates in the last seven years.
But while they may help boost profits, corporate tax cuts are not all that popular with the public.
To gauge popular opinion worldwide, CNBC and Burson-Marsteller commissioned market research firm Penn Schoen Berland to survey more than 25,000 people—both from the general public and the corporate corner office—in 25 countries to find out what they think about how well corporations are shouldering their tax responsibility.
Most of those who responded agree that it’s important for corporations to pay their “fair share” of taxes—including 70 percent of the general population and 67 percent of business leaders in the United States who said it’s “very important.” (That view is not held in Russia, however, where only 12 percent said it is “very important” and more than half said it is “not important.”)
And while most agree corporations should pay their fair share, there’s fairly wide agreement worldwide that they don’t.
Some 62 percent of the general population and 56 percent of executives in developed economies say corporations take advantage of tax loopholes to avoid paying their fair share rather than paying what they owe.
That view seems to be relatively uniform despite the wide range of tax policies and corporate tax rates in the 25 markets surveyed, from a low of 16.5 percent in Hong Kong to a high of 55 percent in the United Arab Emirates, according to KPMG.
Not surprisingly, there’s also a wide range of tax loopholes around the world for companies to use to their advantage: a thicket of deductions, tax credits, allowances for depreciation and other rules and regulations that help cut the final tab that companies end up paying to their national treasuries.
But those tax breaks are also offset by multiple layers of additional taxes that companies pay beyond the levy on their profits—taxes on everything from real estate to financial transactions.
Corporate tax bills have also been eased in recent years by the heavy losses many companies sustained during the 2008 financial collapse and Great Recession. Tax laws generally allow companies to carry over those losses from one year to the next, helping them offset profits earned in years following the years losses were incurred.
The result is that the official “statutory” corporate tax rate rarely reflects how much a company actually pays. In the U.S., for example, various studies have pegged the effective rate as low as 12 percent—less than a third of the statutory rate.
U.S. companies paid an average 27.2 percent of profits in taxes in 2009, the latest data available, considerably less than the 39 percent statutory rate, according to a 2011 analysis by PWC for the Business Roundtable. The U.S. ranked sixth highest worldwide; Japanese companies had the highest tax bill, at nearly 39 percent of profits.
Pomerlau recently analyzed the tax rates of the 34 developed economies of the Organization for Economic Cooperation and Development to see which ones offered the most favorable conditions for businesses. According to his research, Estonia ranked first with a relatively low corporate tax rate at 21 percent, no taxes on dividend income, a nearly flat 21 percent income-tax rate, and a property-tax system that covers only land, leaving buildings untaxed.
France was the least competitive, with one of the highest corporate tax rates, at 34.4 percent, high property taxes, an annual wealth tax, and high individual taxes. The U.S ranked near third from the bottom of the list.
U.S. companies lobbying for lower taxes argue that the relatively high rate makes them less competitive in the global marketplace. Given the widely held belief that companies aren’t paying their fair share, that may be a tough sell.
But Pomerleau argued that popular opinion overlooks the impact corporate taxes have on voters who think companies are getting off easy.
“The business itself may be writing a check, but at the end of the day, investors are going see lower returns on investment, and workers are going to see lower wages in the future,” he said. “So the people who are really paying that [corporate] tax are individuals.”