The Highest Corporate Tax Rates in the World

With the new proposed tax plan, the U.S. may no longer have the highest corporate tax rate in the industrialized world.

Mar 1, 2014 at 11:09AM
Images

Source: Flickr/TaxCredits.net.

The U.S. currently has the highest corporate tax rate in the world among industrialized countries. For the past few years, Rep. Dave Camp (R-Mich.) has been working on a vast overhaul of the U.S. tax system to change that status, and this week he finally unveiled the efforts of his work in what's being called the Camp Plan. Read on for more on how the United States' current tax rates compare with the world's, the Camp Plan's proposals, and what it means for you.

The world's highest rates
Among all nations, the U.S. has the second-highest corporate tax rate, just behind the United Arab Emirates. We have a 35% federal rate and an additional 5% on average at the state and local level. Here's how the top 50 nations stack up:

Rank

Country

2013

1

United Arab Emirates

55%

2

United States

40%

3

Japan

38.01%

4

Angola

35%

4

Argentina

35%

4

Honduras

35%

4

Malta

35%

4

Pakistan

35%

4

Sudan

35%

4

Zambia

35%

4

Brazil

34%

4

Venezuela

34%

13

Belgium

33.99%

13

India

33.99%

13

France

33.33%

16

Namibia

33%

17

Mozambique

32%

18

Italy

31.4%

19

Guatemala

31%

20

Australia

30%

20

Costa Rica

30%

20

El Salvador

30%

20

Kenya

30%

20

Malawi

30%

20

Mexico

30%

20

Nigeria

30%

20

Papua New Guinea

30%

20

Peru

30%

20

Philippines

30%

30

Spain

30%

30

Tanzania

30%

30

Tunisia

30%

30

Uganda

30%

34

Germany

29.55%

35

Luxembourg

29.22%

36

Dominican Republic

29%

37

Aruba

28%

37

New Zealand

28%

37

Norway

28%

37

South Africa

28%

37

Sri Lanka

28%

42

Bangladesh

27.5%

42

Curacao

27.5%

44

Samoa

27%

45

Canada

26%

45

Greece

26%

47

Zimbabwe

25.75%

48

Austria

25%

48

China

25%

48

Vietnam

25%

Source: KPMG. 

Companies have been begging Congress for a simpler, more competitive tax code as U.S. businesses suffer from the high tax rate. Only large multinationals are able to take advantage of the loopholes in the tax code's 70,000 pages. So what's the proposed solution?

The Camp Plan
The Camp Plan, officially called the Tax Reform Act of 2014, is the culmination of nearly three years of work from Camp, who chairs the Ways and Means Committee and deserves a commendation for putting forward the first plan in years for meaningful U.S. tax reform.

His plan would lower the federal corporate tax rate from 35% to 25% in 2-percentage-point steps over five years in exchange for cutting numerous loopholes large companies now use to lower their tax rate. If the Camp Plan becomes law as is, the overall tax rate, taking into account the state and local average, would fall to 30%. That would tie the U.S. for 20th worldwide -- yet we'd still remain above world averages.

Africa average

28.57%

Latin America average

27.61%

Oceania average

27%

Asia average

22.49%

Europe average

20.60%

Global average

24.08%

Source: KPMG. 

The second major change to U.S. corporate tax rules addresses this point, in that 95% of profits made by companies' foreign subsidiaries and distributed to the U.S. parent would be exempt from U.S. taxes. This "participation exemption system" of taxation would make multinationals' taxes far more competitive compared with the rest of the world and would end the current practice that discourages companies from returning profits to the U.S., which slows the U.S. economic recovery.

For companies that have been sitting on billions of profits abroad -- the largest three being Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), and Google (NASDAQ:GOOGL), with a collective $150 billion or so in foreign profits -- they would be able to bring that money back to the States at preferential rates. Profits that have been held in cash would pay a one-time tax rate of 8.75%, while profits invested in foreign subsidiaries' property, plants, and equipment will be taxed at 3.5%.

How it will be paid for
In exchange for a lower and more simplified tax base, businesses would lose numerous current tax benefits that lowered companies' tax rates but contribute to a more complicated system. Without getting into the details, some of the current corporate tax benefits that would be changed (and their effect on tax revenues over the next decade) include the following:

  • Depreciation by modified accelerated cost recovery system would be repealed: +%270 billion in tax revenue.
  • R&D expenditures would now be amortized over five years instead of expensed: +$192 billion in tax revenue.
  • Ad spending would no longer be deducted. Only 50% could be expensed, with the rest amortized over 10 years: +$169 billion in tax revenue)
  • Tax breaks for income attributable to domestic production would be phased out over three years: +$115 billion in tax revenue)
  • LIFO (last in, first out) accounting would be repealed: +$80 billion in tax revenue.

Also proposed is a new excise tax on big banks and other systemically important financial institutions that's expected to raise $86 billion in tax revenue over the next decade.

Overall, the Joint Committee on Taxation expects that the Camp Plan would be a net positive to the economy, with the simplified and lower tax rates yielding 1.5% more GDP growth annually and an additional $700 billion in tax revenue over the next decade. Even better, for a variety of reasons, the chairman thinks these numbers are low and will be revised upward upon further review, meaning more growth for the economy.

What this means for you
These changes to the corporate tax system would be a net positive if adopted, but they shouldn't change your investing strategy. Continue to educate yourself, find great companies, and invest for the long term.

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