Tax Attractiveness Index

The tax law of many countries includes provisions aiming at preventing abuse. Tax authorities try to challenge fictitious or artificial transactions and try to combat tax evasion. Transactions which are only carried out to receive a tax benefit shall be prevented. Furthermore, transactions whose primary intention is tax allowance should be prohibited. If a transaction is considered as harmful tax avoidance under an anti-avoidance legislation, the tax burden is calculated as if the abuse had not occurred. As tax planning schemes might not work under certain anti-avoidance rules, it is favorable for companies if such legislations do not exist.[1]

Generally the country of residence of subsidiaries is allowed to tax the subsidiaries profits. The country of the parent only taxes profits that are distributed in the form of dividends. This system leaves room for abuses by multinational companies as it can be considered as incentive to transfer income to low taxed countries. Therefore, high tax countries implement controlled foreign corporation (CFC) rules to prevent the erosion of their tax base. If a country has CFC rules the companies have less scope in their tax planning activities.[1]

In association with the tax base the corporate income tax rate is the main component of the corporate tax burden. Consequently, countries offering a lower statutory tax rate are more popular among companies as countries with high statutory tax rates.[1]

Important elements of the tax base are tax depreciation rules. The faster companies can depreciate assets, the higher is the present value of the tax savings as the tax base is lowered earlier.[2]

In the European Union (EU) withholding taxes are reduced by the Parent-Subsidiary Directive as well as the Interest and Royalties Directive for transactions within the EU. As a consequence royalties, interests and dividends might be able to be transferred between two EU member countries without withholding taxes being charged on the level of the source state.[1]

Countries that offer group taxation, allow that losses of group members are offset against profits of other members of the group. In this way, the tax burden of a corporate group can be reduced. As a result, a group taxation regime is an advantage for companies.[1][5]

Holding companies are a central tool in many tax planning strategies of companies. The location decision for holdings depends on multiple general tax factors (such as participation exemption for dividends and capital gains, a wide treaty network, low withholding taxes, a group taxation regime) as well as on specific holding regimes. Certain countries thus try to enhance their tax attractiveness by offering special regimes for holding companies. Special rules for holdings include the exemption from local corporate income tax (e.g. Switzerland), exemption from current taxation (e.g. Luxembourg until 2010), the exemption from tax on all disposals of shares in subsidiaries (e.g. Singapore) or a refund of taxes paid to non-resident shareholders if profits are distributed (e.g. Malta).[1]

Loss Carryback lowers the tax burden of companies. Current losses can be offset against profits of past periods. Loss carryback possibilities are an attractive factor for multinational enterprises.[1]

Loss Carryforward lowers the future tax burden of companies. Current losses can be offset against profits of future periods. Loss carryforward possibilities are an attractive factor for multinational enterprises.[1]

Companies that own substantial intellectual property (e.g. patents or trademarks) often provide third parties with licenses and receive royalty payments in return. In some countries ordinary business income is taxed higher than royalty income. Therefore, countries that tax royalties at low effective tax rates (i.e., patent box regime applies) are attractive for companies.[2]

The tax burden of employees is represented by the personal income tax rate. It increases labor cost for corporations. The lower the income tax rate the more attractive the country thus is for a corporation.[1]

R&D investments represent a large expenditure and affect the future product offering. Thus, R&D incentives are crucial for many enterprises. Some countries offer tax incentives, for resident companies conducting R&D, which supports companies to reduce their after tax R&D cost.[2]

A double taxation is caused by the taxation of capital gains, as capital gains contain past company profits and expected future company profits on an after tax basis. It is therefore advantageous for companies if a country grants (partial) tax exemption concerning capital gains.[1]

Within a multinational group, it is possible to transfer profits generated in one subsidiary to other subsidiaries or the parent company via dividends. For multinational enterprises, it is very attractive if profits can be transferred easily without causing further taxation. An exemption of taxation guarantees the highest degree of flexibility. De facto, the distributed profits have already been taxed on the level of the distributing subsidiary. A lot of countries consider this when taxing dividends received: in many jurisdictions, dividends received from domestic and/or foreign subsidiaries are disregarded for the taxable income of the receiving company.[1]

Multinational companies have the opportunity to spread their debts across countries in the most efficient way by means of internal financing strategies. In high tax countries the deductibility of interest expenses is perceived to be most valuable. To contain the abusive use of debt financing, especially governments in high tax countries have implemented thin capitalization rules. These rules are disadvantageous for companies because they aim at limiting the deductibility of interest expenses from taxable income.[1]

When enterprises enforce transactions with related companies they can set prices to shift profits to the entity in the country with the lowest tax burden. To ensure that these transactions are priced according to the arm's length principle, many countries tax authorities have implemented transfer pricing rules. Countries with specific rules on transfer pricing are less attractive from a corporate perspective because they provide less scope for profit shifting.[2]

To avoid double taxation of profits from foreign sourced income double tax treaties are implemented. Furthermore, double tax treaties serve the purpose of lowering or even avoiding royalty payments and interest as well as on withholding taxes levied on distributed profits. This is a reason why companies are located in countries that have signed double tax treaties with many countries worldwide.[1]

Withholding taxes on dividends grant the source country its share in tax revenue. From the perspective of a company, withholding taxes are disadvantageous. Profits are taxed again when they are distributed (in contrast to dividends that are not distributed across borders) even though they have already been subject to corporate taxation. Enterprises in countries with no/low withholding taxes are more attractive because they can distribute dividends with a lower tax burden.[1]

Withholding taxes on interest grants the source country its share in tax revenue. As tax interest payments to lenders are lowered on an after tax basis, withholding taxes are not attractive from the perspective of a company. Therefore, in countries with higher withholding tax rates lenders demand higher before tax interest rates from debtors. Enterprises in countries with low withholding taxes can raise foreign debt at lower cost.[1]

Withholding taxes on royalties grants the source country its share in tax revenue. As tax royalty payments to licensors are lowered on an after tax basis, withholding taxes are not attractive from the perspective of a company. Therefore, in countries with higher withholding tax rates licensors demand higher before tax royalty rates from licensees. Enterprises in countries with low withholding taxes can license intellectual property at lower cost.[1]