Page 19 - Strategic Tax Planning for Global Commerce & Investment

Strategic Tax Planning for Global Commerce and Investment

Benchmarking and Tax Rate Drivers

An important first step in developing a global tax strategy and
plan is to make an assessment of the MNEs ETR relative to its
peers or similar companies and evaluate the factors driving the
company’s profit and related tax burden. In other words, it is
important to understand de MNEs profit and tax drivers and
whether and why the company compares favorable or
unfavorable to similar companies.

Benchmarking of global tax efficiency is the best way to
determine whether tax cost can or should be reduced. This
analysis involves determining the appropriate benchmark and
the right companies to benchmark against. The appropriate
benchmarks are typical ETR and cash tax rate.

Further, this analysis involves understanding the company’s
profit drivers and identifying and rank ordering the
corresponding tax rate drivers that underpin the MNEs
worldwide tax position. A tax rate driver can be defined as any
major financial or operational influence on a company’s ETR.
Profit drivers, and thus tax drivers, generally fall into two
categories: financial profit drivers and functional profit
drivers.

1. Financial Profit Drivers

Financial profit drivers relate to financial risk. Financial profits
represent the return on external and internal business risks and
capital investments. They include return on inventory risks,
accounts receivable risks, warranty risks and foreign exchange
risks. They also include the return from internal deployment of
capital and other income producing assets. Negative tax rate
drivers common to this category are intangible profits in high-
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