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.???

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.”