Taxes aren’t everything

Taxes

When I speak with various company executives and it appears that the company’s home base is not situated where their supplier or market is, I like to ask them why they decided to situate their head quarters in the location they did. Other than the most obvious reason (the fact that it is where they live and/or grew up), the most common answer they give is that it made sense for them from a tax perspective.

Various states/provinces and countries have differing corporate tax rates not only between them but even within a jurisdiction for different industries and company setups. They do this to attract specific industries to make their home in that jurisdiction for a multitude of reasons. Companies can save tens of percentage points in some cases on their profit that will need to be given to the government as taxes and this can be a very significant amount of money every year.

However, this reason for being in a particular place is sometimes overrated. Taxes should not be the number one reason in deciding where to locate ones business. Instead, reasons like the employee pool, proximity to supplier base or to the company’s major market should take precedent in most cases. Having the right employees can more than make up the extra money that will be paid in taxes. Being close to the supplier or market can offer synergies that will make the business stronger and more capable and will likely offer its own monetary savings in some ways.

Perhaps the best argument against looking at the tax rate as the prime factor in the location decision is by looking at some the largest and most successful companies in the world. If you look at some of the largest oil companies in the world like Exxon Mobil and Chevron for example, you will see that they have no choice in where they pay the bulk of their taxes. Since their business involves extracting oil from the ground in countries like Nigeria, which has a corporate income tax rate of a blinding 85%, they deal with a high tax rate whether they want to or not. However, these are still two of the most successful and profitable companies on earth.

U.S.-based Wal-Mart pays almost 1/3 of their profits to governments, mostly the U.S. government. With almost a 33% effective tax rate, surely if the tax rate was that high on Wal-Mart’s priority list they would have moved somewhere with a lower rate a long time ago. However, even though they paid about $6 billion to the U.S. government in taxes, plus another $1.1 billion to international governments, they still netted a whopping $15 billion in after-tax profit.

With such successful examples, it should show anyone looking at where to locate a business that taxes, although important, are not everything and factors such as the employee potential in a given area and the proximity to supplier and customers should take precedent.