tax’ role in global decisions

Friday 6 May, 2011

The Illinois MS Tax Program & the Niagara Foundation hosted this luncheon event International Competition through the Tax Code – How a Company’s Worldwide Investment Decisions are Influenced by National Tax Systems featuring Harry L. “Hank” Gutman of KPMG, Larry R. Langdon of law firm Mayor Brown (formerly of HP), & W. Kurt Meier of the IRS.   I thought about asking for their presentation to post it here, but whenever there are lawyers involved, I shy away from it.   Here’s a summary:


Tax is not the 1st (should be #4-#6)

  • rule of law
  • ownership (& Board of Director) requirements (40% in Nigeria & Malaysia)
  • intellectual property rights
  • political stability (expropriation) & relationship integrity (HP refused to work in the Phillippines until Marcos left)

Human resources

  • labor rates & productivity levels
  • educational levels (HP hired foreign nationals in the US to return them home)
  • union vs. non-union
  • language barriers

General Economy/operating conditions assessment (once there, it’s difficult to change, so centralize in a few locations)

  • site selection (requires infrastructure-access local markets too)
  • local investment incentives (state vs. state competition can tip the balance)
  • access to raw materials & supplies
  • in/out-bound shipping & tariff costs (HP chartered planes to assure supply)

Tax (think through end-to-end & remain flexible to change)

  • income (differentials are ~5-10%)
  • VAT:  value-added (HP paid more VAT than income taxes)
  • other-“creditable?”
  • possibilities (SME’s have little experience & few of the appropriate contacts with current service providers)

NATIONAL TAXES-(corporate taxes in the US are 35%, the highest in the world, but the real effective rate is 24%, the OECD average.  Strictly domestic companies must pay 35%, while international companies can lower their tax rates.  We need to lower our tax rates to attract inbound FDI-Foreign Direct Investment, but this is not being discussed.)

  • stability of tax regime-(legislative) process & proposals (so that you can accurately predict outcomes, parliamentary is different from congressional, & there are different rates of change, i.e. conservatives in the UK are making big changes fast)
  • administration-reporting & examination/enforcement


  • local law & rates
  • cost sharing of intangible development (patents, know-how, etc.)
  • licensing of intangibles through 3rd (or 4th) low tax jurisdictions


  1. “arm’s length method” transfer pricing principle (white papers were written on this 25 years ago, but the US is now less enamored because it helps transfer business offshore.  We did convince the rest of the world though.  We need uniform rules on how to tax ex-US income, how to define compensation, & whether or not to equalize to 3rd countries.  We need to create a tax system where there is no tax advantage to go abroad, or so that taxes are not a decision-making factor.  A challenge is that China has 1M auditors for VAT, but they don’t keep good business records.  The rest of the world is moving away from world-wide systems to more territorial ones.)
  2. enforcement
  • audits increasing worldwide
  • risk of double taxation
  • international information sharing-oecd, jitsic-joint international tax sharing of information, & sharing of tax information & joint audits

ADVANCED PRICING AGREEMENTS tax planning-agree on transfer pricing with local taxing jurisdiction uni- & multilaterally (reduces uncertainty)

COMPETENT AUTHORITY post audit review of transfer pricing adjustment (treaty driven)

  • attempt to avoid double taxation
  • between national tax jurisdictions
  • taxpayer provides information but not involved in meetings
  • no guarantee of success
  • time consuming

“Some countries have competitive advantages so great, they create a hostile tax environment anyway.”

Q & A

The social safety net changes the cultural perception of taxes in Europe, although health care costs 2X as much in the US.

Getting to a level playing field is difficult to evaluate on a number of different dimensions, i.e. foreign vs. domestic, state vs. local, etc.  In Michigan, the economic costs of their incentives for the film industry outweigh the benefits.  The EU pressured Holland & Ireland for giving away too many tax incentives.  The US is schizophrenic about FDI, which is viewed as a necessary evil.  We don’t want anything owned by non-Americans.

The new worldwide accounting system IFRS International Financial Reporting Standards shouldn’t affect tax liabilities, (although LIFO-Last in 1st out, will be abolished) but we shouldn’t abdicate FASB-the Financial Accounting Standards Board.

Changes need to be made for tax regimes to keep up with technology.  Reporting for overseas accounts should be increased, which requires legislative action.  Little uniformity between federal & state jurisdictions threatens the states.


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