16th January 2014
Taxation policy in the US is holding back firms from capitalising fully on globalisation, according to a new report that highlights how the country is falling behind Europe and China in competitiveness.
The survey by UHY suggests US firms are missing out on growth, arguing that would-be American multinationals are held back by tax policy.
UHY taxation and business advisory professionals in 27 countries rated their economies on several factors, including taxation and trade policy, that indicate how internationalised an economy already is and how well positioned it is to take advantage of future globalisation of trade.
Assessed on these factors, the USA scored 3.7, well behind both China, with its score of 4.6, and the European Union member states, with an average score of 5.2 out of a maximum of 10.
Rick David of UHY Advisors, believes the US should do more to encourage and support American companies in exporting and expanding overseas.
“One key factor hampering the US from fully harnessing globalisation is that it levies the highest tax charge on repatriated profits of all countries, potentially acting as a significant barrier to domestic companies looking to expand overseas,” he explained. At 35 per cent, the US levies the highest gross tax charge on repatriated profits of any country looked at.
Mr David suggested the US needs to alter its outlook based on the changing global economy. He said: “In the past Canada, Mexico, Japan and the EU have been some of our most important and most cooperative trading partners, but it is perhaps time for policy makers to look at how we can improve relationships with emerging economies in Africa and Southern and South East Asia as they become bigger consumers and larger importers as their incomes grow.”
Germany topped the ratings with a score of 6.4 out of ten, while Slovakia was not far behind on 6.3 points. The UK scored well, coming in joint third with the Netherlands and New Zealand with a score of 6.0. Denmark, France, Czech Republic, Croatia and and India were also in the top ten. Japan was in 27th with a score of 3.0.
While China fared better overall than the US, with an overall score of 4.6 out of 10, both of the world’s two largest economies’ scores were brought down by the high taxes their governments impose on corporates repatriating overseas profits.
UHY says that these taxes reduce the incentive for businesses to set up subsidiaries overseas, particularly for SMEs, for whom the costs of setting up international operations would be proportionately more expensive. Just under half of the countries in the study imposed no tax on repatriated dividends at all.
Mr David added: “American firms are often household names around the world but actually our taxation system is very poorly geared towards encouraging US companies from growing overseas, with the highest tax rate on ‘repatriated’ profits of any country in the study.”
The United Arab Emirates, ranked recently as the country with the least burdensome tax system, was joint-eighth with a score of 5.1. According to the Paying Taxes report from the World Bank and PwC, the Middle Eastern nation offers the least demanding tax regime, taking the average mid-sized business just 12 hours to comply with its tax obligations every year.
While that report focused on domestic tax concerns, the UHY study highlighted cross-border considerations.
The factors examined included how successful a country has been in negotiating favourable tax arrangements with potential trading partners, its success in growing exports, how important a part trade already plays in its economy, how much tax it imposes on companies ‘repatriating’ overseas profits, how it is rated in the World Bank’s ‘Ease of Doing Business’ survey and labour costs.