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Tax-News Corporate Tax Review - Tax Rates


By Tax-News.com Editorial
August 28, 2012


Despite ongoing pressure to increase tax revenues, a lot of governments have realised that when it comes to corporate tax, the best way to boost the tax take is to encourage corporate expansion, encouraging business start-ups and investment generally by lowering rates, and this has resulted in a downtrend in global corporate tax rates over the last 10 to 15 years.

A multitude of factors must be considered by a multinational business when choosing a location in which to expand its global reach. The stability of a country’s tax regime is just as important as its tax rate, while non-tax factors like labour laws, workforce skills, and telecoms and transport infrastructure all weigh on a company’s decision. Nevertheless, corporate tax rates are perhaps the ‘shop window’ to a country’s investment environment, and they are likely to be the first thing that a business will look at. So it is no coincidence then that governments are keen to promote tax rate cuts above other tax measures when they communicate annual budgets or tax reform plans.

However, it is not just tax competition that is driving down rates. A change in emphasis in tax policy in several countries from taxing income to taxing consumption has also given governments room to cut corporate taxes. Value-added tax and goods and services tax systems have been introduced across the globe, existing sales tax regimes are widening in scope and sales tax rates are generally on the up. At the same time, the world’s average corporate tax rate has fallen in each of the past 11 years, from a shade over 29% in 2000 to just under 23% in 2011 according to KPMG’s 2011 Corporate and Indirect Tax Survey, published last October. Most regions saw falls in average corporate tax rates from 2010 to 2011, but at a slower rate than in the previous ten years: in the Asia-Pacific region, the average rate fell from 23.96% to 22.78%; in Latin America it fell from 25.33% to 25.06%; North America’s average rate decreased to 22.77% from 23.67%; and in Oceania, the average rate went from 24.17% to 23.83%. Europe is the only region were there was an increase in the average corporate tax rate over this period, albeit a small rise from 19.98% in 2010 to 20.12% in 2011. Meanwhile, rates remained flat in the African region.

Based on these results, KPMG concludes that the decade-long era of sharply-declining tax rates “is almost certainly behind us”. However, over the past few months, corporate tax cuts continue to be proposed and enacted in various places, suggesting that present cycle of tax rate competition may still have some legs.

The United Kingdom is one of the fastest corporate tax rate cutters at the moment. After lagging behind its competitors for most of the 13 years of the previous Labour administration, during which UK corporate tax was cut by just 2% to 28%, the Conservative-Liberal coalition government commenced a rolling programme of corporate tax cuts in its first budget in 2010. It is the coalition’s stated aim to make the UK the most competitive country in the G20 in terms of business taxation, and in the 2012 budget it was announced that the programme of phased tax cuts would be accelerated so that the headline corporation tax rate will fall to 22% by 2014 – about 3% below the OECD average.

Greece’s headline corporate tax rate has been falling steadily over the past few years despite the fiscal crisis. From a rate of 32% in 2005, tax on corporate income in Greece fell to 29% in 2006, to 25% in 2007 and to 24% in 2006. There is even talk of a further, steeper cut, to 20%, with the new conservative-led government considering a number of radical measures to restructure the economy and somehow kick-start investment and growth.

Corporate tax rates in Switzerland also continue to trend down, albeit at a slower pace than before. In 2011, the cantonal average in Switzerland fell by 0.49% over the previous year, due mainly to tax cuts in the cantons of Glarus (-3.09%), Freiburg (-1.19%), Uri (-0.7%) and Basel-Stadt (-0.59%). The only slight increase was observed in Grisons ( 0.32%).

To make Thailand more internationally competitive, and further promote foreign investment, the government has slashed corporate income tax this year to 23% from 30%, and will reduce it further to 20% next year. Furthermore, in a speech in Sydney to the Asia Society, together with the Australia-Thailand Business Council, the Prime Minister of Thailand Yingluck Shinawatra disclosed last May that the government wants to attract more regional corporate headquarters, particularly by way of corporate tax cuts.

In April 2011, Dutch State Secretary of Finance, Frans Weekers announced that his fiscal agenda included increasing taxes on consumption whilst reducing the tax burden on companies in an effort to increase the number of international investors positioning headquarters in the Netherlands. This resulted in a modest 0.5% decrease in corporate tax last year to 25%. However, the government is keen to go much further. Initially, it was supposed that an additional 1% cut would take place, but reports surfaced in February this year that the government was considering dropping the rate to as low as 15%, although such plans appear to have been put on ice.

Calling for further cuts in corporate taxes to boost Swedish competitiveness, the Swedish Prime Minister John Reinfeldt said in August that corporate tax should be cut beyond the 1% reduction scheduled for January 1, 2013, which will take it to 25.3%. Although Sweden has traditionally been a high-tax, high-spend economy, corporate tax has actually been fairly competitive compared with other countries in Europe; but the Prime Minister now recognises that the country has lost its edge somewhat in this regard. “It was still true a few years ago that we had a low and competitive corporate tax rate. Today, this is not true any more”, he observed. Reinfeldt said it would be necessary to cut corporate taxes beyond the expected revenue rise deriving from the planned tightening of anti-avoidance rules, especially as Sweden's economy has shown resilience during the first half of 2012.

Even Japan, which for so long suffered the ignominy of having the highest effective rate of corporate tax in the OECD while seemingly unable to do anything about it due to political deadlock, has reduced its corporate tax burden. For a number of years, the total of Japanese corporate taxes, including regional and local taxes together with the federal and central government tax rate, was over 40%. However, following a cut in its statutory rate, and despite a temporary ‘disaster surtax’ until the end of the 2014-15 fiscal year, Japan’s corporate taxes now total “only” 38.01%.

Japan’s long overdue corporate tax cut now means that the unwanted tag of highest corporate tax in the OECD has been passed to the United States. This, at least, seems to have spurred the Administration and Congress into action, and despite the fact that the two main political parties are at odds over most issues, they both agree that action is needed to reduce America’s corporate tax burden sooner rather than later, with a number of legislative proposals having been tabled in recent months. With a headline statutory rate of 35%, the combined US corporate tax when state levies are added to the equation is a little over 39%. Various proposals have been offered that would reduce the statutory rate to a more competitive 25% to 28%. But with the more pressing concern of renewing temporary individual tax cuts uppermost in lawmakers’ minds, this is something that is going to have to wait until after November’s elections. A split Congress, however, could prolong this situation for another two years at least.

On the other hand, there is some evidence that the corporate tax rate downtrend is beginning to stall, with some governments having changed their priorities in response to the debt crisis.

As a trade-off for a higher rate of tax on certain mining companies under the Mineral Resources Rent Tax, the Australian government had planned to cut the corporate income tax rate from 30% to 29% in tax year 2013/14, and to 28% in 2014/15 (with the cuts kicking in a year earlier for small businesses). The plan was rescinded, however, in the 2012/13 Budget. Blaming parliamentary “gridlock” over the measure on the actions of opposition coalition forces, Treasurer Wayne Swan said that funds intended for this initiative will now be redirected to families and other small business-related measures, including the introduction of a loss carry back scheme. Prime Minister Julia Gillard has said that a rate cut remains a high priority for the government, but evidently not high enough. Any cut would have to be affordable and therefore funded by other changes in the business tax system, she has stressed.

In Eastern Europe, land of the ‘flat tax’, developments are taking place that could result in higher corporate taxes, and in some cases, unflattened taxes on income. Within the framework of its austerity programme, the Slovakian government has announced its intention to unflatten its income tax by introducing a higher rate of 22% for high earning companies and a 25% higher rate for individuals earning more than EUR33,000 per year, to ensure that the fiscal burden is increased on both top income earners in Slovakia and companies realizing large profits. Currently, there is a flat tax of 19% in Slovakia.

Hungary has been under increasing pressure to abandon its flat tax plan and was recently rebuked by the IMF for allowing the parliamentary passage of the Financial Stability Law, which significantly constrains changes to the composition of fiscal policy going forward and which fixes in place the flat tax structure of personal income tax (from 2013) and corporate income tax (from 2015).  Severely hit by the economic downturn, and facing an alarmingly rapid deterioration in its fiscal health in 2008, the EU has initiated an ‘excessive deficit procedure’ against Hungary, and it is clearly a concern for the likes of the EU and the IMF that Hungary will not raise sufficient taxes with its current system in order to pay its way.

Latvia, which has a 15% corporate flat tax, has resisted similar pressure from the IMF to unflatten its tax system, while there has been much internal debate about the merits of flat taxation in Estonia and Romania.

Meanwhile, Chilean Finance Minister, Felipe Larrain has confirmed a package of measures which included an increase in corporate income tax rate to 20% in 2013 instead of the expected cut from 18.5% to 17%. This is designed to partly fund a cut in personal taxes for low- and middle-income taxpayers, and a boost in education spending.

Facing a mounting budget deficit, Israel’s corporate tax rate increased from 24% to 25% in January this year, reversing proposals which would have cut the rate to 23% this year, and to 18% by 2015. The Israeli government has a two-year plan in which it lays out measures to reduce government expenditure, but the IMF has emphasized the importance of introducing tax measures to continue the trend of reducing public debt over the medium-term. In addition, a recent report by the OECD found that Israel’s economy is beginning to suffer from the effects of the current global crisis and recommends that debt reduction should remain the government's "top priority" under the new fiscal rule. The government aims to reduce the territory's deficit of 3-3.5% in 2012, to below 2%.

Despite upward pressure on rates in some countries, the trend over the last decade shows that statutory corporate tax rates in the region of 40% or more are likely to be a thing of the past with rates in the lower-to-mid 20% range now more common. However, an analysis of global corporate taxes published last year concluded that the tax burden faced by businesses still varies greatly from country to country and suggests that there is still much scope for governments to lower rates.

This study, by international accounting and consultancy network UHY, demonstrated that huge disparities now exist between countries on the amount of tax they take from businesses, with the tax burden more than three times greater in highest versus lowest taxed major economies.  For example, for those highly profitable businesses in the USD100m category the difference in the amount of tax collected between the highest-taxing country surveyed - Japan - and the lowest taxing - Ireland - is USD29.5m. This, UHY says, means that the same business in Japan would pay over three times more tax than the equivalent business in Ireland. Similarly, a business with profits of USD100,000 per year would pay three times more tax in Brazil than in Ireland.

Noting that many countries have been reducing their corporate tax rates in a bid to become more competitive and attract highly mobile multinational businesses, the research highlights the need for some countries to work harder to become more attractive to businesses, which are less constrained by geography than at any time in history.  

“The difference between countries in the amount of tax they take from business profits is quite staggering,” observed John Wolfgang, chairman of UHY. “It will shock many business leaders that, among the G8 countries, both the USA and Japan impose higher corporate taxes on some businesses than EU countries like France and Germany, which are traditionally seen as high tax economies.”

“High corporate taxes can deter business investment, which can hinder economic growth,” Wolfgang continued. “Over the last decade, many EU countries have slashed corporate taxes, leaving some BRIC nations, such as Brazil and India, with surprisingly high tax in comparison. Companies are increasingly mobile and are able to switch tax domicile with relative ease. This has put governments in a quandary, as they seek to boost tax revenues in order to shore up public finances. Many countries have opted to resolve this problem by increasing personal taxes while reducing corporate tax rates. Once a major economy slashes corporate tax rates, however, it puts pressure on others to take similar measures to remain competitive.”

For this reason therefore, in the longer-term, corporate taxes are likely to continue falling. 

 

Tags: tax | business | tax rates | Japan | investment | budget | Ireland | Israel | Hungary | Slovakia | Thailand | small business | law | sales tax | Australia | Brazil | Sweden | Switzerland | Greece | Finance | Germany

 

 

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