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.”

Findings from a poll, carried out by PricewaterhouseCoopers LLP at its Breakfast Briefing event following the Budget show that UK business leaders are not optimistic about the UK economy and the competitiveness of the tax system.

Only 25% of senior executives say they expect the growth of their business to continue while 24% expect business activity to stagnate. Just over one third (36 per cent) of senior executives believe they will, to some extent, be tightening their companies’ belts in the course of the next year because of the current economic climate.

Despite reassurance from the Chancellor of the Exchequer about the resilience of the economy, overall confidence in the shape of the UK economy has diminished. While 81 per cent of business leaders questioned over the last two years thought that the UK economy was in relatively good shape following Budget announcements, this year only one third (36 per cent) were inclined to agree with this statement.

The tax system

The Budget will be of some relief to UK business because it contained few major surprises. This was particularly important given the amount of change already in-hand. Despite the Red Book and a raft of supporting press releases and documentation, this year’s Budget was more about consolidation, with net reduction in tax payments forecast for 2008/09 of GBP 140m for the measures announced on Wednesday. However, the measures will lead to a net increase in taxation for 2009/10 of GBP 790m and GBP 1.865bn for 2010/11.

However, a lack of progress in some areas could impact the attractiveness of the UK for business from a tax perspective. Two thirds (66%) of senior executives think the UK tax system is less competitive than it was five years ago

Mark Schofield, tax partner, PricewaterhouseCoopers LLP, said:

“It was encouraging to see that there were few surprise changes for large business. However, the challenge of maintaining a competitive tax system in the UK remains.

“Although the Red Book announces that a consultative document on the taxation of foreign profits will be published before summer 2008, businesses remain in the dark as to how this will affect them when the rules are introduced. The proposed new measures for principles based taxation, which are now subject to further consultation, could also give an unfavourable impression of the UK to potential investors.

“Business needs a certain, stable, attractive and coherent tax system to have the confidence to invest in the UK. Therefore the Chancellor must demonstrate clearly how he is going to deliver the government’s commitment to consultation with business to maintain a stable business tax system that remains responsive to business needs and internationally competitive”

As with any Budget, there are winners and losers. The Chancellor’s focus remains on how to retain investment from portable industries in the UK, i.e. the more internationally mobile businesses such as financial services companies, service companies generally and non-capital intensive businesses will benefit from the reduction in mainstream corporation tax from April 2008. On the other hand, industries with more physical capital such as the oil and gas, manufacturing and capital intensive industries could be disadvantaged as a result of the asset depreciation measures.

Survey questions

The PricewaterhouseCoopers Budget Breakfast event took place in London on 13 March 2008. The event was attended by 104 chairman, chief executives, managing directors, chief operating officers, financial directors, chief financial officers and non-executive directors from some of the UK’s largest businesses.

The Australia-Japan tax treaty signed by Australian Foreign Minister, Stephen Smith, in Japan yesterday is a long overdue overhaul that will be a boon for businesses on both sides, according to KPMG Australia Tax partner, Rick Asquini.

“As Japan is a major source of foreign investment in Australia, the improvements in this new agreement around withholding taxes on dividends, interest and royalties will be a very positive step towards maintaining and attracting further investment. We will see more Japanese yen flow into Australia.

“Until now we’ve been operating under an agreement established nearly 40 years ago, business has changed dramatically over this time and this new treaty reflects the strength of the trading relationship.

“I would strongly encourage all Australian companies operating in Japan and Japanese companies here to review how they are financing their operations and assess their dividend and royalty arrangements immediately in light of these changes,” he said.

Mr Asquini said the energy and natural resources sector may face a shake up in light of the short timeframe in which Japanese companies may engage in the exploration of natural resources tax-free.

KPMG’s Transfer Pricing Partner, Anthony Seve said that Japanese companies in Australia would be relieved by the newly established time limit on transfer pricing reviews.

“In the past, there was no time limit on these reviews and that meant there was a high degree of uncertainty and administrative burden for many companies. Now that uncertainty has been removed, it will help Japanese companies to better manage their transfer pricing risk in a more practical and efficient manner,” said Mr Seve.

In addition, through the interpretative notes of the treaty, a clear intention is stated as to the application of OECD principles and methods to resolve Australia/Japan transfer pricing cases.

“It is hoped that this affirmation of approach between Australia and Japan will assist in resolving some difficult transfer pricing cases that are currently under examination,” said Mr Seve.

Singapore ranks second, after the Maldives for the ease of paying taxes, says a recent report launched by the World Bank, IFC, and PricewaterhouseCoopers (PwC). Paying Taxes 2008, the second report in an annual series on tax systems, covers 178 countries worldwide. The report concludes that there is a win-win opportunity for governments and firms if governments simplify tax systems, ease the compliance cost on business, and reduce tax rates.

Singapore performed favourably in the indicators measured, garnering its leading position. The poll reports that on average, a company here takes only 49 hours per year to comply with tax obligations. With only 5 tax payments that companies are required to pay in the city state, Singapore is ranked within the top 10 in terms of fewest number of tax payments.

“Singapore has a strong reputation for the ease of conducting business. An effective tax administration, together with a streamlined, efficient tax collection process, is fundamental to the ability to do business in a country. Given that an inefficient tax system disproportionately affect smaller businesses, it is critical to a country’s development to continue to streamline processes or risk being left behind. Companies operating in Singapore benefit from an efficient tax system and low rates of tax and are therefore better able to concentrate on their core business competencies,” says Paula Eastwood, Head of Corporate Tax, PricewaterhouseCoopers Singapore.

Tax reforms that make it easier for firms to pay taxes can increase government revenues by broadening the tax base. This year, 31 economies improved their business tax systems, and 65 have done so over the past three years. Bulgaria was the top reformer, and Turkey was runner-up. While reducing corporate income tax was the most popular reform, implemented in 27 economies worldwide, many countries have reduced the compliance burden by simplifying or eliminating other business taxes. Countries in Eastern Europe and Central Asia had the most reforms in 2006 and 2007, but tax rates remain highest there and in Africa. The compliance burden is highest in Latin America and in Eastern Europe and Central Asia.

“Reducing the tax burden was the second most popular reform of the business regulatory environment this year. Despite previous reluctance to reduce tax burdens for fear of cutting government revenues, some governments that have implemented tax reform have reaped the benefit of higher investment and economic growth,” said Rita Ramalho, coauthor of the report and tax specialist with the World Bank/IFC Doing Business project. “Economies with a lower business tax burden also have more new firms entering the market.”

The case of Egypt is instructive. Two years ago it implemented major tax reforms, which included reducing the corporate income tax rate by almost half. This has increased the government’s tax base and revenues.

This year the top 10 economies for ease of paying taxes are, in order, Maldives, Singapore, Hong Kong, United Arab Emirates, Oman, Ireland, Saudi Arabia, Kuwait, New Zealand, and Kiribati. The 10 economies where it is most difficult are, from 169 to 178, Panama, Jamaica, Mauritania, Bolivia, the Gambia, Venezuela, the Central African Republic, the Republic of Congo, Ukraine, and Belarus.

Complying with administrative tax requirements remains a real burden for business. Globally, on average, a company spends almost two months a year complying with tax regulations 15 days for corporate income taxes, 21 for labor taxes and contributions, and 21 for consumption taxes. However, there are wide variations between countries. For example, it takes 105 days to comply with consumption taxes in Azerbaijan but only one day in Switzerland.

The study allows direct comparison of tax systems from around the world. It shows how businesses are affected not only by tax rates, but also by the procedural burden of compliance. The report focuses on the number of tax payments made, the time it takes to comply, and the cost of taxes, which is measured by the total tax rate. The total tax rate covers five types of taxes that firms pay: profit, social, property, turnover, and other taxes, such as municipal fees and fuel taxes. The steps, time, and cost indicators are used to determine the overall ease of paying taxes.

Compliance issues can significantly affect the overall ranking, either counteracting the benefit of a low tax rate or mitigating the impact of a high tax rates. Scandinavian countries, while known for high taxes, do well on the ease of paying taxes because of a low compliance burden.

The report calls on businesses to play a strategic part in reform. Ms Eastwood added: “Businesses could be more upfront in revealing their total tax contributions, to help governments assess their real economic footprint. More and better information about the taxes paid and the cost of compliance is essential to understanding how tax systems affect businesses. It is clear that governments need to look across all taxes when considering reform. Greater transparency helps focus public debate on where reform efforts are most effective. Ultimately, this will give business more confidence and willingness to invest.”

In addition, the report shows how widely tax systems vary in Asia. Singapore (2nd) and Hong Kong (3rd) are among the top 10 countries cited for ease of paying taxes. A snapshot of other Asian economies’ performance includes: Brunei (28th), Cambodia (21st), China (168th), India (165th), Indonesia (110th), Japan (105th), Korea (106th), Lao (114th), Malaysia (56th), Philippines (126th), Taiwan (91st), Thailand (89th) and Vietnam (128th).

The findings demonstrate that when considering reform, governments need to look at all taxes paid by companies. Corporate income tax is only a part of the story, accounting for only 37 percent of the total tax rate, 26 percent of the number of hours spent on tax compliance, and 12 percent of the number of tax payments. Labor taxes and contributions add significantly to the tax cost in some countries and also to the compliance obligations.