In an election season where taxes spark debate among all political camps, much of the dialogue has been focused on corporate tax rates impacting U.S. businesses.

In examining recent developments in domestic and foreign corporate tax rates, CCH, a Wolters Kluwer business, has taken a closer look at two key corporate tax figures that can dramatically impact the bottom line – the nominal tax rate compared to the effective tax rate.

“It is a company’s effective tax rate, not the nominal rate, and its cost of capital, which drives the quantitative component of investment decisions,” said Jerry Nestor, managing editor for CCH Publishing and contributor to the CCH Integrator Blog, a regularly updated source of global tax topics and issues. “Although the nominal or headline rate for a country is a good starting point for analysis, the goal is to compute the effective rate – the actual rate that a company pays when it applies the appropriate tax rate (general or special rates in some cases) to the tax base – the taxable income after reduction by the deductions (both general and special) allowed to a particular company.”

Corporate Tax Rates: United States and Japan
Japan recently lowered its corporate income tax rate, which moved the United States to the top of the global list of the highest nominal corporate income tax rates in the world. But earlier this year, President Obama released his corporate tax reform plans for reducing the U.S. corporate income tax rate and broadening the U.S. corporate tax base (CCH Tax Briefing, February 24, “The President’s Framework for Business Tax Reform”).

The corporate income tax rates that usually get the headlines are the nominal rates, but that’s only part of the story. Investors who see Japan’s new rate is at 38.01 percent and that the President’s plan proposes lowering the U.S. rate from 39.2 percent to 28 percent need to do some further research beyond the nominal/headline rate figures. In terms of tax incentives encouraging investment, more emphasis should be placed on a company’s effective tax rate – which can be quite different than its nominal/headline rate.

In looking at the United States and Japan as examples, the charts below provide some background on the tax complexity in each country.

Effective Actual Corporate Tax Rates By Selected Industry 2007-2008

(Source:  U.S. Treasury, Office of Tax Analysis)

Japan Corporate Tax Rates

(Source:  CCH World-wide Tax Rates and Answers)

Depending on the type of industry and location, the effective tax rate, which encompasses a company’s specific tax base and taxes other than income taxes, can paint a clearer picture on an investment decision than the nominal/headline rate. For more analysis on the topic, visit the CCH Integrator Blog.