Question

If you were a CEO making a decision upon where to locate future business operations, would you locate in a low-tax or high-tax country, all other factors being equal? As a practical matter, why is this a complicated decision?

Answer 1

Solution:

In order to start future business operations, a CEO would ideally prefer a country with a lower tax structure against a country with a high tax considering all the other factors being equal. A lower tax for business implies less cash outflow from the company and the same can be utilized for investing in various activities like new business or reinvesting in the existing business etc.

But practically, this is a complicated decision to decide whether to go with a lower tax as against high tax.

§ A higher tax is normally applicable in the counties which are developing and a lower tax in developed countries. If you invest in a developed country and not choosing a country which is developing might risk the chance of the company not being part of the growth story where business potential could be high. Another aspect is normaly countries which reduce the corporate income tax on depending on the economic cycle , usually benefits workers as the new investments result a wage growth through better productivity.

§ The tax applicable at the Federal or central structure could be a lower one, but it depends on the various taxes applicable at the state or the province level within the country where there could be higher taxes made applicable which could result in a higher overall tax. So, the location is key aspect.

§ Depending on the nature of business, the companies maybe required to pay income and sales taxes applicable specific to the industries in their respective states.

§ The companies intend to start business could be levied taxes by the states depending on the how it is assessed by the states. The taxes levied could be assed based on the work carried out or based on where the customers are located or based on whether it is a service sector or manufacturing sector or an exempted sector.

§ There are incidences of income tax being avoided by the owners of the corporations through avoidance of salary and reflecting the same it in the profit which goes through a lower corporate tax in the country applicable. But this could result in the authorities coming down on the company and could be placed under scrutiny by the authorities,

So, the decision on choosing the right tax structure requires a better and deeper understanding on various aspects by thecompanys decision makers, before finally deciding on investing on those countries with a certain tax structure.