U.S. Falling Behind Europe and China on Tax and Trade Globalization

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The United States is falling behind Europe and China in efforts to capitalize on globalization and could potentially miss out on future economic growth as a result, according to a new survey by the international accounting and consulting network UHY.

UHY tax and business advisory professionals in 27 countries rated their economies on several factors, including taxation and trade policy, that indicate how internationalized an economy already is and how well positioned it is to take advantage of future globalization of trade.  

The factors examined in UHY’s study included how successful a country has been in negotiating favorable tax arrangements with potential trading partners, how successful it has been in growing exports, how important a part trade already plays in its economy, how much tax it imposes on companies “repatriating” overseas profits, how it is rated in the World Bank’s “Ease of Doing Business” survey along with labor costs.  

Based on these factors, the U.S. scored 3.7, far behind both China, with its score of 4.6, and the EU member states, with an average score of 5.2 out of a maximum of 10. 

While the U.S. did well on the “Ease of Doing Business” rating, placing fourth globally, its economy remained more aligned to domestic activity than many of its competitors. The U.S. also had low scores for certain factors measuring success in negotiating favorable tax treatment by trading partners. At 35 percent, the USA levied the highest gross tax charge on repatriated profits of any country examined by UHY.

Germany topped the ratings with a score of 6.4 out of ten, while Slovakia was not far behind with 6.3 points.  China was the best-performing of the world’s top three economies with a score of 4.6, and India was the best-performing BRIC country with a score of 5.1, helped by its low labor costs with an average monthly salary less than half as high as China’s. 

“The USA ranked poorly in the survey, suggesting that while it is cushioned by the sheer size of its own domestic economy, it could achieve more by doing more to encourage and support American companies in exporting and expanding overseas,” said UHY Advisors COO Richard David in a statement. “One key factor hampering the US from fully harnessing globalization is that it levies the highest tax charge on repatriated profits of all countries, potentially acting as a significant barrier to domestic companies looking to expand overseas.”

While China did far better overall than the U.S., with an overall score of 4.6 out of 10, both of the world’s two largest economies’ scores were brought down by the high taxes their governments impose on corporates “repatriating” overseas profits, according to the survey. 

UHY said the taxes reduce the incentive for businesses to set up subsidiaries overseas, particularly for small and midsize businesses for which the costs of setting up international operations would be proportionately more expensive. Just under half of the countries in the study imposed no tax on repatriated dividends at all.

Opponents of tax breaks on repatriated corporate profits point to how low the effective tax rates are for many multinational companies already. In some cases, multinationals are able to avoid paying corporate taxes in the U.S. entirely by moving their profits to low-tax countries, even though the statutory tax rate in the U.S. seems relatively high at up to 35 percent.

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