The average three-year effective tax rate (ETR) through December 2011 of industrial product (IP) companies was 26.3%, according to a new PwC U.S. study. This was a 0.7% increase over the 25.6% ETR in the prior year.
Many ETRs were lower than statutory rates, says PwC in its 2012 "Assessing tax" study, driven by the impact of foreign operations and tax incentives related to research and innovation.
Companies based in the U.S. had higher ETRs than many of their global counterparts, while companies based in Canada and Germany, for example, reported lower ETRs.
The higher ETR results for U.S.-based companies, said PwC, are a strong example of why many of these companies are focused on corporate tax reform. In March, the corporate tax rate in the United States of 39.2% became the world's highest when Japan lowered its rate to 38.01%.
In February, President Barack Obama called for a reform of corporate taxes that would peg the rate at 28%. Republican challenger Mitt Romney has recommended a corporate tax rate of 25%.
According to the report, the economic recovery for IP companies resulted in a decrease in the volatility of ETRs across the sectors as corporate earnings increased, although individual sector performance remained uneven. For example, during 2011, not one of the 46 chemical companies included in the study reported a loss in their audited financial statements.
Volatility in the ETR among global IP companies moderated in 2011, as the recovery continued to take hold. This resulted in a rise in the ETR across multiple sectors, said Michael W. Burak, U.S. and global industrial products tax leader for PwC. We are beginning to see increased levels of investment spending as companies refocus on strengthening their products and competitive positions, earning tax incentives that provide a favorable impact to the ETR compared to the statutory rate. Furthermore, as emerging markets develop and companies increasingly expand into these territories, we expect more companies to benefit from the lower tax rates within developing countries.
The report includes a section focused on transfer pricing, a critical area of focus for IP companies, in part because of their expansion into emerging markets and the fact that, despite economic recovery, there is a continuing strong need for tax revenues by the relevant government authorities.
Since IP companies are expanding into emerging markets, they must develop robust and defensible transfer pricing structures and policies. They must also deal with the growing number of jurisdictions that have adopted rigorous transfer pricing policies that, at times, rely upon inconsistent intercompany transfer pricing laws and standards, said PwCs Burak. Multinationals must also respond to more aggressive enforcement by tax authorities, a consequence of the attempt by many countries to prevent perceived abuses by taxpayers and a desire for increased revenues to reduce deficits. We are seeing these developments take place both in developed and emerging countries.
PwCs tax benchmarking analysis included 324 companies across six sectors: aerospace & defense, chemicals, engineering & construction, industrial manufacturing, metals and transportation & logistics.
