This is according to KPMG's corporate and indirect tax survey 2007, which, for the first time, tracks both corporate and indirect tax rate trends, shedding light on the way in which overall tax revenue calculations made by governments affect the relationship between tax authorities and business.

KPMG concludes that indirect taxes appear to be playing an increasingly important role in the revenue-gathering strategies of many countries around the world. This is a difficult policy for governments to follow, says the report, because the link between higher indirect taxes and higher prices is obvious to anyone who buys goods and services through higher prices, but the link between lower corporate tax rates and increased inward investment is less well understood. This has major implications for companies, their tax strategies and their accounting systems, the report noted.

Loughlin Hickey, Global Managing Partner of KPMG in the UK, observed that: "There is a clear tendency among nations in competition to attract and keep inward investment, to reduce their corporate tax rates and seek to make up the shortfall with increases in indirect taxes. This is rather than relying solely on growth brought about by corporate investment to expand this tax base. These tactics suggest that as well as attracting new investment, retaining current investments is a success in itself."

Hickey said that this was illustrated by Singapore, where Prime Minister Lee Hsien Loong had announced that a corporate tax cut would have to be paid for by an increase in GST. "If we bring down our corporate tax, every percentage point will cost us $400 million. It is big money," Lee told the Singapore Parliament last year, adding: "Therefore we must consider raising indirect taxes." Prime Minister Lee then went on to announce in his 2007 budget a 2% cut in corporate tax to 18% and a 2% increase in GST to 7%.

Rates of GST, VAT or its equivalent levy vary widely globally. The lowest rate is to be found in Aruba, where it is charged at 3%, the highest rates are to be found in Sweden, Denmark and Norway at 25%. On a regional basis, the average EU VAT rate at 19.5% is higher than the OECD average of 17.7%. The average rate across the Asia Pacific region is 10.8%, and in Latin America the average is 14.2%. However, KPMG says that it is difficult to draw direct comparisons between individual jurisdictions or regions because of the huge amount of special tax regimes and exceptions applied by many countries.

Across the OECD, the average rate of VAT/GST has held steady for the last six years, but the average corporate tax rate has drifted downwards by more than a tenth, from 31.4% to 27.8%. "So without changing rates, VAT/GST type taxes have become steadily more important as sources of revenue," the study noted.

In 2003, the last year for which figures are available, the average contribution of VAT/GST type taxes to government revenues across the OECD rose to 32.1%, having stayed between 31.2% and 31.7% for each of the previous five years. In some OECD countries, for example Mexico and Turkey, VAT/GST already contributed more than 50% to government budgets.

One of the advantages for governments of VAT/GST over corporate tax is that it provides a steady flow of revenues throughout the year rather than widely-spaced lump sums. However, this has major cost implications for companies which, effectively acting as a tax collector, must ensure that their accounting systems are up to date.

On the other hand, the survey shows that corporate tax rates are continuing to fall worldwide, but there are signs that this trend is slowing. Globally, average rates have decreased from 27.2% last year to 26.8% this year - significantly less than the major reductions seen in the late 1990s and early 2000s.

Of the 92 countries which participated in the KPMG survey, 18 reduced corporate tax rates, while two increased them. With such a small drop in average global rates, the report suggests that these adjustments were relatively slight, the major exception being Turkey, which slashed corporate tax by 10% to 20%. There were several significant reductions in the EU, where 17 out of the 27 member states cut rates, the largest being Bulgaria which decreased corporate tax by 5% to 10%. This took the EU average rate to 24%, 1.6% lower than last year. By comparison, the OECD average has fallen by less than 1% to 27.8%. Corporate tax cuts in India, Malaysia, and an increase of 2.5% in Sri Lanka leaves the Asia Pacific average broadly unchanged at 30%. Despite a material reduction of 8% in Aruba and smaller decreases in Columbia and the Dominican Republic, the Latin American average has fallen by just 0.5% to 28%.

"It would be interesting to conclude that corporate tax rates have reached their natural low points," noted Loughlin Hickey, "but it is clear that corporate tax rates in Europe are still being driven down, even as indirect taxes remain high."

However, while significant reductions are in the pipeline in the UK, Germany, Spain, Singapore and China and will be reflected in next year's report, Hickey concluded that: "It looks as if international tax competition has some way to go yet".