An urgent need for more revenue is pushing many governments into active moves to increase the tax take from indirect taxes, and a worldwide broadening of the tax base for corporate income taxes, KPMG International??™s latest annual survey of tax rates affecting business has found. Figures from KPMG??™s 2009 Corporate and Indirect Tax Rate Survey showed that the long term slide in tax rates applied to company profits in Europe and Latin America has come to a halt in 2009.

But while this may be a pause before competitive pressures continue to drive corporate tax rates lower, there are some clear signs that any further cuts are likely to be paid for by widespread restrictions on tax allowances and tighter enforcement.

In Europe, average rates stayed at 23.2 percent, the first time in 13 years that they have failed to fall year-on-year. The UK corporate tax rate remains at 28 percent, having been reduced from 30 percent in 2008.

In Latin America, the average corporate tax rate this year was unchanged at 26.9 percent, the first time there has been no cut in rates since 2004.

Only in the Asia Pacific region has the average rate this year matched the cuts of previous years, falling from 28.4 percent in 2008 to 27.5 percent in 2009.

Looking at indirect taxes, mainly Value Added Tax (VAT) or Goods and Services Tax (GST), rates in Europe have risen from 19.5 percent to 19.8 percent and in Latin America 15.9 percent to 16.2 percent.

Among the Asia-Pacific countries there was a marginal drop in indirect tax rate from 10.9 percent to 10.8 percent.

???Indirect taxes are generally very stable.??? said Sue Bonney, head of tax at KPMG Europe ???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.

???But now we are seeing more active moves in this direction. Here in the UK, figures from HMRC* predict that revenues from corporate tax receipts are set to decline by around 21 percent in the current tax year.

???If the UK VAT rate had not gone down, we estimate that the fall in VAT receipts over the same period would only have been around ten percent ??“ showing that VAT is more resilient than corporate tax in the downturn.

???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 percent next year.

???All this is clear evidence of a major long term change in the way that many governments are funded. For companies, it means that the management of indirect taxes will become much more important as tax authorities focus more attention on the collection of ???real-time??™ taxes.???

Turning to taxes on profits, many countries have used them as a competitive tool to attract corporate investment. But the urgent need for tax revenues to plug holes in public budgets around the world, as a result of the global recession, seems to have forced a subtle change in this policy.

This year, many governments have acted to widen and strengthen their tax bases by measures including:

• restricting the circumstances under which companies can use losses to reduce taxable profits,
• taking a more aggressive approach to enforcing transfer pricing rules,
• reducing the tax deductibility of interest payments.

At the same time, there has been a significant increase in international co-operation among tax authorities, especially on action against tax havens and exchange of information. It remains to be seen whether that co-operation is converted into pressure on those countries with the lowest rates to move closer to the average.

???It is likely that headline corporate tax rates will resume their fall in time, but companies are likely to find themselves paying for the reduced rate in other ways,??? said Sue Bonney. Overall effective tax rates for global companies may well rise, due to the broadening of the tax base.???

SunTrust Banks has announced that it has named Terry Vacheron Senior Vice President and Corporate Director of Tax. Ms. Vacheron, who will report to SunTrust Chief Financial Officer Mark A. Chancy, succeeds Deborah Jamison who previously announced her plans to relocate to New York.

“Terry is a dynamic leader whose knowledge of SunTrust and respected professional experience will serve as a tremendous asset to our Company,” said Mr. Chancy. “We appreciate the many contributions Debby has made during her 21-year career at SunTrust as well as her assistance during this transition period. We wish her well in her new endeavors.”

As Corporate Director of Tax, Ms. Vacheron will be responsible for overseeing all aspects of SunTrust’s corporate tax matters including federal and state income and local taxes as well as information reporting to clients.

Ms. Vacheron has more than 20 years of corporate tax experience most recently working as a tax consultant for SunTrust. Previously, she was a Tax Partner at Deloitte & Touche, LLP for five years, and served as the Federal Income Tax Director at SunTrust from 2001 to 2003. Prior to that, she was a Tax Partner at Arthur Andersen LLP.

EY Middle East has appointed Sherif El-Kilany to lead its regional Tax practice. Currently based in Sherif is a Fellow of the Egyptian Society of Accountants and Auditors and the Egyptian Society of Taxation. He is Co-Chairman of the Customs and Taxation Committee of the American Chamber of Commerce. He is also a member of the Egyptian Businessmen’s Association and heads the suburban chapter of the Egyptian Society of Taxation.

Melissa Geiger (nee Greer), partner in KPMG’s Tax practice, has been named on Management Today’s annual ‘35 Women Under 35′ list, which recognises outstanding young women in business in the UK.

Melissa, 32, is KPMG’s youngest female partner having become a partner in 2008. She works within KPMG’s financial services tax practice and leads the Financial Services Merger and Acquisitions Tax team in London. Over the last few years, Melissa has managed the tax aspects of some of the largest deals in the European private equity and banking market.

After graduating in 1997, Melissa joined KPMG’s Tax Business School in London and passed the Chartered Tax Advisor exams.

Melissa joined Accenture’s Tax Strategy team in 2001. In 2002, she moved to Standard Chartered Bank where she worked in their tax planning and structured finance division.

Melissa rejoined KPMG in 2005. In the same year she became a member of the KPMG mentoring scheme. She mentors a number of women in KPMG’s Emerging Leaders/Talent Management Programme and is an active member in the Women Achievement networking programme for sixth form girls.

Melissa commented:

“I was absolutely delighted to be included in Management Today’s 35 women under 35 list along with so many talented young women from such a variety of backgrounds. I am extremely grateful to my colleagues and the many role models I have here at KPMG who have actively supported me by providing an environment where everyone is encouraged to succeed and make the most of their individual talents.”

Sue Bonney, Head of Tax at KPMG, said:

“Melissa is a hugely talented tax professional and a highly valued member of our tax team. We are very proud that her enormous career success achieved so early in her professional life has been recognised in the Management Today list and we look forward to seeing her develop further.”

Half of global businesses expect a recovery next year, according to research by KPMG International. And taken collectively, over eight out of ten respondents predicted recovery by 2011 as 11 percent said recovery would come in 2009, 51 percent said 2010 and 22 percent predicted 2011.

UK businesses were more pessimistic than the global sample as a whole, predicting recovery in 2011, later than European peers such as Germany, Italy and Spain, who all forecast 2010.

For half of the businesses surveyed, the economic downturn is prompting a change in strategy, with changing customer buying habits and cashflow pressures cited as the main reasons for this. Businesses in the Asia Pacific region said they were more likely to adopt radical new strategies in response to the downturn than those in Europe and the UK.

In what KPMG believes to be one of the most comprehensive surveys to date of global businesses’ views on the recession, 852 senior decision makers were interviewed, representing companies from 29 countries with revenues ranging from US$250 million, to over US$ 5 billion.

Sue Bonney, Head of Tax at KPMG Europe, commented: “Our research reveals the truly seismic scale of the impact of the current global recession on businesses around the world. Although commentators, encouraged by a stockmarket rally, are detecting green shoots, UK business does not expect a recovery until 2011. This is in line with the pessimistic assessment published by the Bank of England recently and the earlier findings of the IMF that financial crises lead to long drawn out recessions. What’s clear from our survey though is that many companies are facing a radical overhaul of their corporate strategy to reflect the rapidly changing world.”

Key findings

Half expect recovery in 2010 but UK more pessimistic, expecting it in 2011
Globally, 11 percent of respondents expected recovery to come in 2009, 51 percent expected to see it in 2010 and 22 percent in 2011. In the UK, the consensus was that it would be 2011 before we would see any recovery.

Recession prompts strategy changes but Asia Pacific business more likely to adapt than European enterprises
Half the overall global sample said they planned a radical change in strategy as a result of the recession. However there were marked contrasts between the various geographic regions. Nearly 90 percent of businesses in Japan and 84 percent of businesses in Singapore were planning radical changes to their business models in the next decade. In India, the figure was 72 percent and in China it was 66 percent.

In Europe the picture was different with far fewer companies planning such radical changes. The lowest percentage was among companies in the Czech Republic and the Netherlands where only 20 percent were planning major changes to their businesses, rising to 25 percent in Hungary and 42 percent in the UK. The highest proportion in Europe was Ireland where 63 percent expected radical change.

Sue Bonney commented: “The question clearly arising from these results is why are European businesses so less likely to plan radical changes than their peers in the Asia-Pacific region. It may be that European enterprises are more mature, more entrenched and may perceive change to be too difficult.

“Indeed for some businesses such as manufacturers with complex, bespoke plant, radical change may well be a major challenge. The results do, however, suggest that it could be the Asia-Pacific businesses that make a virtue out of necessity and adapt to survive in the post-recession world. European enterprises run a risk of being left behind.”

Cost control measures planned in all global businesses, but especially among UK companies
Understandably in the current climate, cost control was a priority in the short term. More UK respondents had plans for specific cost control measures than the global sample as a whole, with almost twice as many UK companies planning to reduce headcounts than their global peers.

88 percent of UK respondents said they planned to reduce procurement and supply chain costs against 67 percent globally; 84 percent of UK respondents planned to optimise business processes (by automation for example) against 64 percent globally; and 74 percent of UK respondents had headcount reductions planned against just 41 percent globally.

Sue Bonney concluded: “Whilst the UK shares the global view that recovery is in sight in the medium term, our results suggest that British businesses are more pessimistic than their global peers and that more are braced for more pain to come in the form of cost control measures to get through the downturn. Whilst short to medium term survival is clearly of critical importance, adapting to the changing commercial world is also crucial and UK businesses will need to consider their longer-term strategies for the post-recession environment.”

Deloitte has launched a new innovative company car scheme believed to be unique in the UK.

The initiative will help reduce costs for participating employees as well as reducing carbon emissions.

Mike Moore, a director in the employment taxes group at Deloitte, said: “The new company car tax rules coming into force from April 2009 change the tax relief available for businesses and are based on CO2 emissions. As such, employers will need to think again about how their company car schemes will work.

“At Deloitte, we decided to take a more innovative approach by widening out the availability of company cars to all 12,000 employees nationwide - all cars in the new Deloitte All Employee company car scheme have C02 emission levels of 120g/km or below.”

Who benefits?

With the new scheme, there are three key areas where savings can be made:

Employees: tax savings can be made by sacrificing salary in return for a benefit in kind, for example a basic rate tax payer could give up salary taxed at 31% (income tax and National Insurance Contributions) and take a petrol car with emissions below 120g/km and pay tax on 10% of the list price;

The employer: in addition to taking advantage of volume discounts, businesses will have the ability to recover VAT, and save on National Insurance;

The environment cars with lower CO2 emissions generally use less fuel, which means less fuel cost.? All cars within the scheme have CO2 emission levels of 120g/km or below.

John Kerr, managing partner for talent at Deloitte, said: “We are delighted that we are now in a position to be able to open up the company car scheme for all permanent Deloitte employees, allowing them to enjoy affordable, environmentally friendly vehicles.

“This scheme provides a car for business and personal use which includes in the monthly cost fully comprehensive motor insurance, roadside assistance, maintenance and servicing and road fund licence.”

Moore added: “Our new scheme goes against all historical trends where company car schemes are traditionally only open to senior executives.? In fact, since its introduction just two weeks ago, it has already generated interest from over a third of the workforce.”

The prospect of billions in tax rebates according to the UK government’s own estimates came a step closer today when the UK’s High Court backed an earlier European Court of Justice decision that the UK’s system of taxing foreign dividends contravenes EU law.
The payouts relate to UK tax levied in the past (and currently) on dividends paid from EU-based companies paid to UK taxpayers (mostly corporates) going back several years.

And although HM Treasury confirmed in this week’s pre-budget report that it intends to change the rules such that dividends received by UK companies from foreign companies will not be taxed in the UK, the UK taxation of previously paid foreign dividends is in dispute with hundreds of claims for refunds already filed in the UK Courts and with HMRC.

The sums of money at stake are considerable; in a submission to the European Court of Justice in 2006, the UK government estimated HM Treasury stood to lose billions in potential tax refunds.

Jonathan Bridges, Associate Partner, International Corporate Tax at KPMG in the UK, said

“Today’s High Court judgement makes absolutely clear that the UK dividend taxation rules breach EU law. This paves the way for massive tax rebates. Given the fragile state of public finances and the forecast drop in tax receipts as a result of the economic downturn, the last thing that the Treasury will want to do is make refunds on this scale so we fully expect there to be an appeal. But today’s decision is a significant step on the way to a victory for the taxpayers in this case.”

Background and technical details of the case

At the heart of this case is the principle that member states should not discriminate against one another so a transaction between two member states should be treated in the same way as a domestic situation.

In line with this principle, in an earlier ruling (December 2006) the European Court of Justice confirmed that foreign sourced dividends should not suffer more UK tax than UK-sourced dividends but the ruling went on to state that various methods by which to achieve this equanimity are acceptable.

What this means is that, in the view of the ECJ, parity can in principle be achieved through a credit or exemption system. The ECJ then referred the matter back to the British courts to determine whether the UK rules operate to achieve this parity.

The UK currently operates a credit system to relieve double taxation on foreign sourced dividends. In contrast, the UK exempts UK sourced dividend payments to a UK taxpayer entirely irrespective of the actual tax suffered at the level of the UK subsidiary from whose profits the dividends derive and this is the kind of model expected for all foreign dividends once the changes announced in the pre-budget report have been drafted into law and enacted. The current rules often result in profits generated overseas being taxed more heavily that profits generated in the UK.

As companies across Britain are gripped ever harder by the credit squeeze, cash is becoming more and more important.

And thanks to a recent legislative change, the number of companies that can claim a cash rebate in the form of a research and development tax credit has been boosted substantially.

In order to claim a cash rebate, businesses must be loss-making and must qualify as Small or Medium Sized Enterprises (SMEs). In August this year, the size limits for what constitutes an SME were doubled. SMEs with taxable profits can still claim R&D tax relief but this will be in the form of reduced tax payments rather than an actual cash rebate.

Unfortunately, those businesses most in need of a helping hand, may find that they are unable to claim R&D tax credits as a result of a legal Catch 22. Under the rules, if a business is reliant on R&D tax relief in order to remain a going concern, it is precluded from claiming the benefit.

David O’Keeffe, head of the R&D tax credits team at KPMG in the UK said: “There is a cruel irony in denying a business a lifeline that could save it precisely because without such support, it will go bust. The reasoning behind these rules is that Europe does not want tax rebates propping up struggling enterprises. Companies should most definitely make sure that they claim these valuable tax benefits but if they’re really in the last chance saloon, they may be out of luck.”

Under the new rules, to qualify as an SME, a company should have fewer than 500 employees and either turnover of no more than ??100m or gross assets on the balance sheet of less than ??86m.

David O’Keeffe said: “When hunting for cash down the back of the corporate sofa, businesses really would do well to remember R&D tax credits. Many are not aware of the changes to the SME definition so don’t realise that they qualify.”

At the same time as the size limits for SMEs were doubled, the value of the R&D tax relief was raised from 150 percent of qualifying spend to 175 percent. And for large companies the value of the relief was also increased from 125 percent to 130 percent.

David O’Keeffe continued: “The new limits mean that loss-making SMEs can claim a cash credit worth around ??24 for each ??100 of qualifying R&D spend a valuable benefit, especially in the current climate.”

According to KPMG, some businesses are confused about what sort of activities can count as qualifying R&D spend. David O’Keeffe explained: “Often it’s assumed that only people in white coats working in laboratories will qualify. But this is a misconception, sectors such as banking, insurance companies, retailers and airlines also undertake qualifying R&D and we have made successful claims for many companies in these sectors.”

An R&D tax relief claim can be sizeable, depending on the amount of qualifying spend. For example, KPMG successfully claimed relief of ??900k for just one year for a ??95 million turnover SME.

Multinationals with globally mobile employees are adopting a wait and see approach to their policy for dealing with issues arising from the UK’s new tax rules for non-domiciled individuals (’non-doms’), according to a survey by KPMG in the UK.

Most of the respondents, who were HR professionals with responsibility for international assignments, said that the changes to the non-dom tax rules were unlikely to affect their assignment selection processes.

However when questioned on their likely reaction to specific issues arising from the new non-dom rules (such as whether they would be prepared to pay any additional UK tax the employee or their spouse incurs as a result of the rules) a significant proportion of the respondents appeared to have no firm policies in place.

Sarah Robert, Director, International Executive Services at KPMG in the UK; said: “It is not good policy to have no policy. No clear guidance tends to result in subjective decisions being made on issues arising with different employees. Such decisions are usually inconsistent and this often leads to employee discontent.”

Sarah Robert continued: “Despite the non-dom rules’ complexity, it is surprising that large global employers have not made greater progress in adapting to this new legislation which has been in force since 6 April this year. It may well be the case that UK-based HR professionals are struggling to get these issues discussed outside the UK or amend global policies to reflect these peculiarly British rules.”

John Griffith-Jones has been appointed as Chairman of KPMG’s EMA (Europe, Middle East, Africa and India) region.

EMA is the largest of KPMG’s three regions, comprising more than 3,000 partners and 55,000 staff in 105 countries.

John, who will also continue in his role as joint Chairman of KPMG Europe LLP, said:

“I am looking forward to the challenge of ensuring that KPMG continues to expand in a region that includes some of the world’s fastest growing economies.

“At a time when the global business environment is changing so rapidly, part of my role will be to help member firms’ clients benefit from KPMG’s increased international capability and increase their awareness of our services and insights.

“I will also continue to maintain my focus on the UK marketplace - meeting our senior clients, regulators and opinion formers.”

John joined KPMG in 1975, and held senior positions in the Audit and Corporate Finance practices. He was CEO of KPMG in the UK for four years, and was appointed Chairman and Senior Partner of KPMG’s U.K. member firm in 2006.

John takes over from Ben van der Veer, who is also retiring as the Senior Partner of KPMG’s member firm in the Netherlands. He was EMA region Chairman for three years and successfully led EMA through a period of unprecedented growth and change.

KPMG has also appointed Alan Buckle as head of its Global Advisory practice, which accounts for more than 30,000 professional partners and staff in KPMG member firms globally. Advisory works with clients to help them grow their businesses, improve their performance while enhancing governance and risk management.

Alan was previously Chief Executive of KPMG’s Advisory practice in Europe, and led KPMG Consulting in Europe, prior to its separation and sale. His clients have included global corporates and government agencies.

Alan said:

“This is a tremendously exciting time to be asked to lead KPMG’s Advisory business, with fundamental changes occurring to economies and businesses globally. The shift of industrial activity and capital flows further east and south are changing the nature of the market for advisory services - both the demand from our firms’ clients and our own internal delivery models.

“Key themes for the next few years will include unparalleled focus on the fastest growing Eastern markets; the completion of the integration of our mature Western practices; and harnessing the ever increasing power of technology.”

Tim Flynn, Chairman of KPMG International, said:

“In this time of unprecedented change for businesses globally, it is critically important that KPMG continues to advance leaders who have extensive international experience. John Griffith-Jones and Alan Buckle are outstanding professionals who are well suited to lead in this rapidly changing world, and I am proud to welcome them as they join our global executive team.”