For many manufacturing
companies, labor as well as transporta-
tion and logistics are the geographically vari-
able considerations that exert the greatest influence on a
project’s financials. In high-margin industries that produce
large amounts of taxable income, however, foreign enter-
prise income tax can have an even greater impact on proj-
ect financials than either of those factors. In those types of
industries, therefore, a location decision can be heavily
influenced by in-country tax rates and the country’s per-
mitted investment structures. Examples of permitted
investment structures, which vary from country to country,
include wholly owned foreign enterprises and “toll manu-
facturing.” The latter, an arrangement under which one
company processes raw materials or semi-finished goods
for another company, can reduce taxable income.
Although manufacturing companies must consider many
factors when making site selection decisions, they often find
that a single geographically variable cost input most heavi-
ly influences the location decision. For the purposes of
this discussion, we refer to this type of critical cost
driver as an “investment optimization model.” Three
common examples include:
TAXES CHANGE THE COST PICTURE
The only way to capture the true impact of corporate
income tax on a location decision is to develop a financial
model that shows both the before- and after-tax implica-
