Europe Leads The Race To Cut Corporate Tax

by Robert Lee, Tax-News.com, London

10 April 2006

Company tax rates across Europe are being driven steadily down by a combination of competition amongst EU member states for jobs and capital, and economic liberalization, according to a survey by KPMG, the professional services firm.

Average corporate tax rates in the EU fell by 0.28 percent to 25.04 percent in 2005, thanks to rate cuts in six EU member states including France, Greece and the Netherlands.

This compared with average rates of 28.31 percent for the OECD countries, 28.25 percent for Latin America and 29.99 percent in the Asia Pacific region. In the UK, the rate was unchanged at 30 percent.

The countries with the highest tax rates were Japan with 40.69 percent and the United States with 40 percent. Lowest was the Cayman Islands with a corporate tax rate of 0 percent.

Of the 86 countries surveyed, the majority had either kept their tax rates unchanged since 2004, or had reduced them. The largest reductions were in Barbados (-5 percent to 25 percent), Albania (-3 percent to 20 percent), Israel (-3 percent to 31 percent) and India (- 2.9 percent to 33.66 percent).

Countries reporting significant increases were the Dominican Republic (+5 percent to 30 percent) and the Philippines (+3 percent to 35 per cent).

“The accession of 10 new members to the EU in 2004, and the continuing efforts of the EU judicial system to break down barriers to free movement of capital, seem to have combined to increase tax competition among EU member states," observed Loughlin Hickey, Global head of KPMG’s Tax practice.

However, Mr Hickey stated that a low tax rate does not necessarily mean a low tax burden, and national tax burdens can vary significantly regardless of the headline corporate tax rate.

“Effective tax burdens can vary significantly depending on the attitude of governments and their tax authorities to corporate taxpayers, ranging from aggressive policing to actively promoting business collaboration. Clarity and certainty in the application of tax laws is a rare, but much prized commodity," he noted.

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