Low Corporation Tax 'Crucial Profit Driver'
Falling corporation tax has been a crucial driver of profitability over the last two decades, increasing pressure on CEOs to reduce their company's tax bill, Will Duff-Gordon, research director at financial information provider Markit, told CNBC on Tuesday.
Duff-Gordon said effective corporation tax levels were as low as 13 percent in Ireland and as high as 32 percent in the U.S., providing "massive" arbitrage opportunities.
His comments come as Apple CEO Tim Cook prepares to defend his company's tax affairs before Congress.
The Senate has accused the tech giant of using an elaborate off-shore system to avoid paying tax on billions of dollars of profits.
(Read More: Ireland Says Not to Blame for Apple's Low Tax Rate)
"The fall in corporation tax over the last 20 years has been the second biggest driver of company profitability after earnings – nothing to do with new products or management, just falling tax," Duff-Gordon said.
As a result, company bosses face intense pressure to reduce the amount of tax paid, he said, adding that Government attempts to clamp down on tax avoidance had fallen behind.
"A CEO would come under a lot of fire for not being as clever as he or she can be about optimizing their tax. These are the rules that are in place – there are incentives to put your sales where you get good discounts and to put your cost base where you get good grants," he said. "Governments haven't kept up with globalization."
He said that from an investing point of view, the winning companies at the moment were healthcare and IT – which are relatively portable and can choose to move location – and the losers were utilities and miners, who face high headline taxes.
But in the medium term, those looking to short stocks might reverse this strategy, he added.
"You cannot see tax going higher for the extractive industries or the utilities because before long they will say they can't make any more money. However, can tax rise for technology and healthcare companies, and can it be more difficult for them to relocate themselves? Yes, it can," he said.
Tax will also be in the spotlight at the EU summit in Brussels this week.
European Commission President Jose Manuel Barroso wrote to Europe's leaders ahead of the meeting saying: "Tax fraud and evasion is rapidly gaining importance in public debate and for good reason. At a time of fiscal consolidation Member States are not maximizing the tax revenue they could have and the issue of fairness is squarely on the agenda."
He said discussions would focus on the exchange of information about tax, to ensure "full and consistent coverage of all relevant types of income across all Member States."
ING Senior Economist Carsten Brzeski said it was unlikely that European leaders would achieve a "big breakthrough" on tax this week.
But he added: "An agreement could be reached on how to improve the sharing of tax information. The so-called EU savings-tax accord, setting standards on how countries can collect information on income from savings that their residents earn in other nations, could be concluded by the end of the year."
(Read More: Apple Stock Valuation 'Crazy': Sculley)
- By CNBC's Katrina Bishop, follow her on Twitter @KatrinaBishop