Financial Forces Governments Can Exert 223 direct tax on personal and corporate income. Figure 8.2 compares corporate taxation rates in G20 countries. Note that these are the statutory rates; the effective rates may be considerably lower, due to tax breaks that are a result of effective lobbying, tax planning strategies, and creative accounting. The New York Times reported that in 2010, CCULTURE FACTS General Electric paid no U.S. taxes and received a tax benefit or credit of $3.2 billion,21 despite the 39.1 percent statutory U.S. corporate tax rate. The U.S Tax Foundation, a tax research group that tends to be pro-business, calculates that the average effective U.S. corporate tax rate is more like 27 percent, while the world’s average is in the 20 percent range,22 with the OECD average at 24.11 and the EU average at 21.34.23 In addition to using tax benefits to decrease their effective tax rates, corporations also use two basic strategies to minimize their taxes, profit shifting and tax inversion. Profit shifting is moving profits to locations with lower tax rates, while tax inversion is buying a foreign company in a lower-taxed location and then using that company as the legal location for the corporation. An example of this strategy is Burger King’s purchase of the Canadian firm Tim Hortons Inc, in British Columbia, where the tax rate is 26 percent (vs. about 35 percent in the United States) in mid-2014. In September 2014, the U.S. Treasury Department announced new regulations that will reduce the attractiveness of this tax-avoidance technique, but analysts suggest that corporations will still find the inversion technique useful in reducing tax liability.24 A value-added tax (VAT) is a tax charged on the value added to a good as it moves through production from raw materials to final purchaser. It is really a sales tax whose payment documentation from one stage to another becomes important for tax credits, because the seller collects the tax for the goods sold and then receives credits for VAT paid earlier in the production process. Countries that levy value-added taxes are permitted by World Trade Organization (WTO) rules to rebate the value-added taxes to exporters, an incentive that makes the exports less expensive and thus more competitive. The third general tax category is the withholding tax. This is an indirect tax levied on passive income such as dividends, royalties, and interest that the corporation pays to nonresidents, CULTURE FACTS @internationalbiz Culture influences the way people think about and handle money. Even the notion of wealth itself is a cultural construct. In some cultures, such as the Native American culture, people can acquire wealth through giving gifts, a distribution, rather than through acquisition. In some cultures, charging a borrower to use money—that is, financing without risk—is wrong, as in Islam’s Sharia law. Is cost the critical issue in a transaction? Or is it risk? Do people tend to buy on price, as in North America? Or do they buy on relationship, as often occurs in most of Asia? #cultureinfluencesmoney #priceorrelationship FIGURE 8.2 Comparisons of Corporate Tax Rates, 2015 50% 40% 30% 20% 10% 0% USA Japan Argentina G20 Corporate Tax Rates, 2015 Brazil France India Italy Australia Germany Mexico South Africa Canada Indonesia China Korea Turkey United Kingdom Saudi Arabia Russia Source: http://taxfoundation.org/blog/another-study-confirms-us-has-one-highest-effective-corporate-tax- rates-world
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