They may ask: Is the rate competitive? Are business costs treated fairly? Are there attractive incentives? Is the approach to collection, enforcement, taxpayer rights and dispute resolution sound?
Governments know tax policy is only one ingredient for optimal growth. Others include sound infrastructure, stable social and fiscal policies, fair and effective legal systems and an educated and competitive workforce.
When it comes to the global tax environment, governments’ current mantra is a low headline rate, but with a typically broader base.
To attract investors, some countries are opting to cut corporate income tax (CIT) rates and/or roll out innovation incentives such as patent boxes.
In our outlook for global tax policy in 2017, eight of 50 countries surveyed planned to reduce their CIT rates in 2017. Of the remainder, 40 planned no change to their tax rates, while just two nations forecast rate increases. Eleven of the 50 respondents said they plan to introduce more “generous” R&D incentives in 2017.
The entire environment
While such moves are helpful to business, governments need to recognize that organizations will look beyond tax rates or incentive packages and consider the entire tax environment.
Businesses want assurance that a country will treat taxpayers fairly. It’s one matter to qualify for some form of tax incentive, but what happens if an investor fails to get the proper stamp on a form or misses a deadline and the incentive disappears?
Similarly, business will assess if taxpayers are given the following: fair treatment in the examination process; access to an appeals process, including unfettered access to courts; and the opportunity to avail themselves of dispute resolution procedures or competent authority processes under international tax treaties without repercussion.
Businesses and government policymakers are typically aligned in the objective of growth — for their company and their country, respectively — but neither are willing to take on undue risk in exchange. Government policy coupled with fair enforcement is a critical balance to achieve the growth desired by all.
Businesses want to invest in stable and growing economies. This means destinations where governments are investing in their infrastructure, education and health care systems to support the flow of goods and a competitive workforce. And where there is stability in leadership and transparent legislative and legal processes, there is a basis for solid, long-term growth.
The United States is one country currently debating its tax system. The US policy of taxing US-based businesses on their global earnings (instead of a territorial approach) leaves the US as the only G7 country with this system. When coupled with a corporate tax rate that exceeds all other developed nations, reform is a real possibility.
Despite these perceived negatives, the US has been able to avoid undue capital flight. How? In general the country’s trade and immigration policies have been viewed as positive for encouraging US investment.
To attract steady, long-term investment, a country must evaluate the whole of its tax, fiscal and legal systems, along with its physical infrastructure and labor resources.
Achieving the right mix is a balancing act that countries are attempting all around the world.
While tax policy is certainly a key factor in choosing where to invest, when viewed in isolation it is rarely sufficient to change the economic behavior of a business or investor. For most businesses, it is about finding the right mix between the tax environment and other growth and value drivers.
As policymakers seek new ways to drive economic growth, they want and need to hear from companies about what that mix would be and how potential changes would affect business decisions.
The economy can only grow when all the right pieces are in place.