I'm building a project finance model for a ~$200M chemical plant based in the EU, with the parent Company located in the US. I have been using a corporate income
Corporate Tax Rate for Project Financing Model: Large International Chemical Plant
Answers
If you have a specific location, you need to use that country's tax rate as well as consider any special incentives that the project team may be able to negotiate with the tax authorites. Then you need to consider how the project will be financed and whether any cash will be required to be repatriated to the parent company because those facts will also significantly impact the effective tax rate. Assuming a $200M plant is significant to your company's business, your corporate tax group should be able to help you model the tax implications of the project. Only at a very early stage in the project ("is there enough commercial support to justify investing in engineering and location selection") would the average effective rate for your company be reasonable because the tax conseqences of location are very material for most projects.
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Thank you Deanna, this was helpful from a broader context... these are things we're going to have to get professional advice on as we progress. We are getting several special tax incentives out location.
Jake, Great guidance... thank you so much... as we progress I will reach out...
Hi Atul,
As Deanna recommends, it is best to query the company's tax group about their tax planning strategies but allow me to clarify a bit more. Without getting into all the complexities and exceptions, the way tax rules work for a US parent company is that the foreign affiliate first pays tax to its local country. In the popular European countries, that can range from a low of 12.5% for Ireland to the low 30% range for some major countries. When earnings are distributed as a dividend to the US from the affiliate, the US parent will then have pay the difference up to the US 35% rate (plus state/local income taxes). So, for example, if the plant is located in Ireland -- a popular location for these purposes -- companies will intentionally not pay a dividend in order to "defer taxation" and not pay the additional US tax. So, depending on the company's tax strategy, the tax rate you use can be either the foreign rate or the US rate, or some blend if only partial dividends are remitted.
Please get in touch if you desire additional details.
Jake
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