The Impact of Anti-Inversion Rules on the Effective Tax Rate
To recapture the trillions of dollars of taxable profits sitting offshore, new Treasury rules were introduced in April to stop inversion transactions and so-called earnings-stripping tactics.
As a line item on the financial statement, the effective tax rate (ETR) or the tax rate that corporations pay on net revenue, impacts both public and private companies. The goal is to have the lowest ETR possible. After all, a lower tax rate means more cash flow to fund operations, expansion, and, of course, benefit shareholders and owners.
Historically, many corporations have relied on inversion strategies to reduce their ETR. By legally moving money to foreign countries, corporations have been able to avoid hefty U.S. corporate tax rates, which now average 39.1 percent (a combined federal and state tax). In an effort to recapture the trillions of dollars of taxable profits sitting offshore, new Treasury rules were introduced in April to stop inversion transactions and so-called earnings-stripping tactics.
These new anti-inversion rules make it difficult to significantly reduce the ETR at the federal level, and do little to impact the state ETR portion. As a result, companies are increasingly looking for ways to decrease the state tax portion of the ETR. The good news is that many states are willing to provide tax incentives in an effort to bring jobs and tax revenue into their respective states. The bad news is that there are literally thousands of varying state tax laws that make deciphering which states have the most attractive tax laws for a given corporation very difficult. With industry-specific tax breaks, different rules for net operating losses (NOLs), and general business tax credits, a corporation can easily get buried in a tangle of state-specific income tax data.
What are the tools tax teams can use to reduce the state portion of their ETR? Risky, error-prone spreadsheets and manual databases are not the answer. Fortunately, advanced state and federal tax analysis software solutions are now available that equip corporate tax teams with the ability to strategize and select the best ways to reduce the state portion of their ETR. These powerful tools automatically track state-specific laws, including easily misinterpreted NOL rules, as well as analyze potential tax liability for multiple states, multiple years, and multiple scenarios.