DC Velocity - March 2011

tions of the proposed investment. One company’s experience, outlined below, illustrates how the tax cost factor can affect the overall cost of a high-margin, direct-investment manufacturing project. ( The company cannot be identified, but the site selection project and the results discussed here reflect its actual experience.)

The company, a manufacturer of medical devices, needed a new location for a manufacturing plant. The project’s objective was to establish the operation in a location that would be globally cost-competitive over 10- and 15-year analysis periods. The project’s leadership was charged with determining whether a tax-advantaged, low-operating-cost, or some other type of location represented the best option.

Figure 1 illustrates the influence of income tax on project financials and the extent to which it affected the relative attractiveness of the locations under consideration. This graphic clearly illustrates the potential risk in developing a location strategy without considering income tax.

The following key observations emerge from the before-and after-tax assessment:

▪ Location A (tax-advantaged location): This was the highest-cost option before tax. But when tax was incorporated into the financial analysis, Location A’s low corporate income tax made it competitive.

▪ Location B (tax-incentivized location): Despite having higher before-tax costs, significant tax incentives—zero income tax for a period of 10 years, in this case—made Location B the most cost-competitive of the four locations.

▪ Location C (low-operating-cost location): The lowest-cost location before tax, Location C became less competitive due to its burdensome corporate income-tax structure.

▪ The United States: The United States was the second-
lowest-cost location before tax, but it became the most
expensive site candidate after taxes were factored in.

CONSIDER THE COST CONSEQUENCES

For industries producing high-margin products, it is critical to incorporate corporate income tax into any financial assessment of potential manufacturing locations. Failure to do so can result in the selection of a financially disadvantaged location. But this advice is not limited to manufacturers of high-margin products. It is also prudent for industries producing lower-margin products to include tax analysis in their location strategies. That’s because many countries offer incentives that have the potential to reduce investors’ tax liability for an extended period and, as a result, could change the desirability of a candidate location for manufacturing.

Matt Jackson ( matt.jackson@am.jll.com) is managing director of strategic consulting at the real estate firm Jones Lang LaSalle. Matt Highfield ( matt.highfield@am.jll.com) is a senior vice president of strategic consulting for the same company.