The Impact and Design of Business Taxation in a Globalised World

1. The Impact and Design of Business Taxation in a Globalised World London April 27, 2009

2. Worldwide Corporate Income Taxes Kevin S. Markle and Douglas A. Shackelford University of North Carolina April 27, 2009

3. 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.”

4. 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.”

5. 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

6. What Do We Find? • 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.

7. Regression Equations Three specifications:

8. 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

9. Countries Sample: parents in 85 countries subs in 195 countries BUT only know sub locations in 2008

10. UK Tax Rates

11. U.S. Tax Rates

13. ETR conditional on location of subs

14. Multinational Tax rates over Time

15. Multinational Gap over Time

16. Impact of Sub Location by Parent Country Subs Parents

17. Future Work--Clusters • 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?

18. What Do We Find? • 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.

19. The Impact and Design of Business Taxation in a Globalised World London April 27, 2009

20. Worldwide Corporate Income Taxes K. Markle and D. Shackelford Comments by Julian Alworth 20

21. Summary • 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 21

22. Comments • 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) 22

23. Comments • Ranking of statutory / ETR similar • Is this expected? • ETR significantly lower than statutory rates • Is this expected? 23

24. Ranking of statutory and ETR 24

25. Effective Tax Rate Comparisons: UK 25

26. Effective Tax Rate Comparisons: Germany 26

27. 27

28. Assessment of this finding • 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 28

29. Startling Results • 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 29

30. The Impact and Design of Business Taxation in a Globalised World London April 27, 2009