KPMG reports that corporate tax rates fall worldwide

Corporate tax rates continue to fall worldwide, finds KPMG’s Global Corporate and Indirect Tax Rate survey

Corporate tax rates fall by just under one per cent worldwide to an average of 25.9 per cent (2009: 26.8 per cent)

Corporate tax rates across the world have continued their decline, with the average dropping 0.9 per cent to 25.9 per cent from last year’s 26.8 per cent, according to KPMG’s Global Corporate and Indirect Tax Rate survey 2008.

And despite a two percent cut this year, at 28 per cent, the UK’s corporate tax rate remains higher than this latest global average.

The UK also remains higher than the EU average rate which declined one per cent year on year to 23.2 per cent. According to this latest survey, the UK now has the 19th (equal with Sweden) lowest corporate tax rate of the 27 EU member states, a slight improvement on last year’s 21st position. At 23.2 per cent, the EU remains the global region with the lowest average corporate tax rates.

Sue Bonney, head of tax at KPMG Europe LLP, commented: “Undoubtedly, the corporate tax rate is an important factor for businesses but it is far from the only factor. Other issues such as political stability, infrastructure, access to new markets, a skilled labour force and so on are all huge considerations, as demonstrated in KPMG’s recent survey of Global Capital Flows*.

Chris Morgan, head of international corporate tax at KPMG in the UK, added: “Nonetheless, tax does play a role and its importance was highlighted recently with more companies announcing their intentions to relocate their headquarters outside the UK. But this is not about the rate itself - it’s about how the UK system is able to tax foreign profits. And the argument is not about whether these profits should be taxed at 28 per cent - it’s about whether they should be taxed by the UK at all.”

For the first time, not a single country raised its corporate tax rate

The survey revealed that, whilst not every country analysed had reduced its headline rate of corporate tax in the year under review, for the first time since 1994, not one single country in the 106-strong sample had raised its corporate tax rate.

According to KPMG in the UK, this continued downward pressure on worldwide and European corporate tax rates will add to the pressure on the UK authorities to address the UK’s perceived lack of competitiveness on tax.

Chris Morgan continued: “The challenge to the UK authorities is to find a way to improve the country’s tax competitiveness that is genuinely revenue-neutral. They can’t afford a tax giveaway but business will not welcome a major hit in terms of extra taxes. The only way to find an acceptable solution is for all parties to really engage in the debate. It’s important that the various working groups established have a mandate to make real proposals and are not just talking shops.”

Sue Bonney added: “As corporate tax rates fall worldwide and corporations become more fleet of foot in relocating to favourable jurisdictions, national governments can no longer rely on corporate tax receipts. But they still need to collect revenues and they are looking towards indirect taxes to do this.”

A switch to indirect taxes

For several years there have been signs that governments throughout the world have been switching their attention to indirect taxes, but this year that trend has become much clearer.

The generally accepted idea is that indirect taxes compensate for reduced corporate tax yields. From this, it could be expected that regions with low corporate tax rates have higher indirect tax rates. The survey supports this to some extent: against a global average indirect tax rate of 15.7 per cent, the EU (with its low average corporate tax rate) has the highest average indirect tax rate among the world’s regions at 19.49 per cent.

Looking at the UK, in contrast to its corporate tax rate (well above the EU average), on indirect tax, it is the 4th lowest in the EU at 17.5 per cent. This relatively low rate plus a system that has remained stable for several years are likely to be the factors behind the UK being voted the best country in the world to deal with from an indirect tax perspective in a recent KPMG survey **.

Taking a global perspective, whilst corporate tax rates have been falling worldwide, indirect tax rates have remained relatively stable, suggesting that if indirect tax yields are compensating for declining corporate tax yields, this is being achieved in other ways: namely a widening of the indirect tax base and a stricter application of the rules.

Sue Bonney concluded: “Although, indirect tax rates on the whole have not changed, while corporate tax rates have been pushed steadily down, more and more governments are introducing indirect tax systems. There are currently 135 countries with these systems in place and more in the pipeline. There is also a steady expansion of the transactions that these taxes are applied to, and a new focus from tax authorities on efficient collection of indirect taxes through corporate tax departments.”