Canada Bucks Trend With Falling Corporate Tax Rate

by Mike Godfrey, Tax-News.com, Washington

16 November 2009

A KPMG survey has found that while Canada's corporate taxes are high relative to many of its main competitors, the general rate is continuing to fall in contrast to recent global tax rate trends, while its indirect taxes remain comparatively low and stable.

KPMG International's latest annual survey of business tax rates indicates that Canada's general corporate income tax rate of 33% for 2009, which includes federal and provincial tax, compares favorably with the US corporate rate of 40%, but is still higher than the OECD and European Union averages.

"Canada's corporate tax rate is the fifth highest among the 30 OECD countries in the survey," said Firoz Talakshi, Leader of KPMG in Canada's International Tax practice. "But Canada's general corporate tax rate will continue to fall until 2012, when the federal tax rate will be 15%, versus 19% in 2009."

Looking at indirect taxes, the survey indicates that Canada's Harmonized Sales Tax (HST) and combined General Sales Tax (GST) and Provincial Sales Tax (PST) rates are generally lower than many other countries' value-added tax (VAT) and GST rates. HST and combined GST-PST rates are around 13%, depending on the province (from a low of 5% GST only in Alberta, to a high of just over 15% GST-PST in Prince Edward Island).

In contrast, the average VAT rate in Europe is 19.8% for 2009 (up from 19.5% in 2008) and the average VAT/GST rate for OECD countries is 17.6% for 2009.

Although the upcoming harmonization of British Columbia and Ontario's PST with the GST will not effectively change the tax rate in those provinces, harmonization generally broadens the tax base that rate applies to, making more things taxable. As of July 1, 2010, when the harmonization takes effect, only three provinces will still have PST.

"Indirect taxes are generally very stable," said John Bain, Associate Partner at KPMG in Canada's Toronto office. "Up until this year, taxes on corporate profits have tended to decline each year while indirect taxes have stayed roughly the same. So for the past five or six years, revenues from indirect taxes have quietly been contributing a larger and larger part of many government incomes.

KPMG is observing more active moves in this direction. The number of countries with indirect tax systems is now over 150 and rising annually. Those governments that already have these systems are widening the range of services that attract VAT. Rates in Asia-Pacific are expected to rise as their systems develop and mature, and increases already planned are likely to take the average in the European Union up to 20% next year.

“All this is clear evidence of a major long-term change in the way many governments are funded. For companies, it means that the management of indirect taxes will become much more important,” says Bain.

Turning to discuss taxes on profits, Bain also observed a changing trend in taxes on profits. Historically rates have been set low to attract corporate investment. At this juncture, however, with governments clamoring for additional revenues, there appears to be a subtle change in this policy with governments marginally increasing corporate tax rates worldwide.

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