Many factors go into influencing where and how a business will operate. One very important issue to companies is the different corporate tax rates that countries have. This article will focus on the different international tax rates of countries considered to be technologically advanced, namely Germany, Japan, Russia and the United States.
Germany Corporate Tax
Germany has a corporate income tax at a rate of 15 percent. KMPG states that there is a “solidarity surcharge…of 0.825 percent” as well as a “local trade tax in a range between 7 percent and 17.15 percent.” These numbers brought the normal corporate taxes for a business in Germany to a rate of 29.44%. Of the four nations mentioned above, this tax rate is the third lowest of the group.
Russia Corporate Tax
Russia has two main sections of tax payments; federal and regional. The federal tax is small, a mere “2 percent” (http://www.kpmg.dk). The regional taxes a much higher, reaching “18 percent with the right to reduce to 13.5 percent” (http://www.kpmg.dk), though how this ‘right’ works is not specified, nor are its requirements. This brings the total corporate tax rate of Russia to 20%, by far the smallest of the four countries. One may note that of technologically advanced nations, members of the European Union tend to have lower corporate taxes imposed on businesses.
Japan Corporate Tax
Japan, according to the KMPG’s 2009 survey, has the highest percent tax on corporations when local taxes are combined with the corporate income tax. The corporate tax rate is “30 percent (22 percent on the first JPY 8 million for companies with paid-in capital of JPY 100 million or less)” (http://www.kpmg.dk). Then there are local taxes that “vary depending, for instance, on the local government policy and the amount of paid-in capital of the company” (http://www.kpmg.dk). The highest the tax in Japan “…can be higher than 40.695 percent” (http://www.kpmg.dk), like the tax rate for Tokyo, which “…is 42.05 percent with no size-based business tax imposed” (http://www.kpmg.dk).
United States Corporate Tax
The United States has a ‘progressive’ tax system for corporations, where the percent paid on money changes depending on how much one makes. It can range from 15% if income is less than 50,000 USD or 35% if one is making more than 18,333,333 USD. See GSU for entire list of corporate tax rates. For the sake of this examination, only the highest bracket of 35% will be relevant. KMPG states that on top of the corporate income tax “…State and local governments may also impose income taxes ranging from less than 1 percent to 12 percent.” There are ways to “deduct…state and local income expenses when computing…federal taxable income.” This deduction or rates tends to bring, “a net effective rate of approximately 40 percent” on corporations. This rate is second only to Japan, and is number one if the company makes enough that the subtraction of State and local taxes doesn’t corporate income bracket of the company.
One could note that, for any progressive tax where the taxes increase in percent with income, or for any tax on an income percentage, current accounting practices promote something called debt financing. In order to reduce their tax bracket, or just the amount of income they record (have to pay taxes on) debt and interest payments are tax deductable, and are subtracted before paying taxes. UMichigan found that the result is having “…overall, a net preference for debt finance … To the extent that leverage is thereby higher than otherwise, so also is the susceptibility of the corporate sector to bankruptcy.” Such a system may be what allows for recessions when growth cannot keep up enough for a company to continue to pay off the large sums of debt they kept to lower their tax bracket.
By – Domenic Gabriella for Trade.org