New Delhi, (IndiaPRwire.com) , In a review of corporate tax rates at the beginning of 2007 in 92 countries, the average rate in the EU was 24.2 percent, compared with 27.8 percent in the OECD countries, 28 percent in Latin America and 30.1 percent in Asia-Pacific.
This is the fourth year that European rates have been below those of the Latin American countries and the sixth that they have been below those of Asia Pacific. Additionally it is 11 years since average rates in the OECD nations were below those of Europe.
The survey also found that indirect taxes in Europe are the highest in the world. Value Added Tax (VAT) or Goods and Services Tax (GST) rates in the EU countries average 19.5 percent, compared with 17.7 percent in the OECD, 14.2 percent in Latin America and only 10.8 percent in Asia Pacific.
“This is the first year that we have added indirect taxes to our long-running survey of international corporate tax rates,” said KPMG’s Global Head of Tax, Loughlin Hickey, “and the figures seem to confirm a trend for indirect taxes to rise to compensate for lower corporate tax rates.
“We only have one year’s figures for indirect taxes, so it is too early for us to say definitively that there is a link. But this does coincide with what governments say about the decisions they are making.”
The highest indirect taxes in the world, over 25 percent, are found in Denmark, Norway and Sweden. Each of these countries has a corporate tax rate of 28 percent, which puts them at the upper end of the corporate tax rate scale.
However, they are still some way behind the U.S. and Japan, whose corporate tax rates of 40 percent and 40.7 percent respectively make them the most expensive of the developed economies for corporate taxpayers. Japan’s main indirect tax rate is 5 percent, while the U.S. does not have a federal GST, but the states impose their own sales taxes at various rates.
Across the OECD countries, the average VAT rate has held steady over the past six years at around 18 percent, while the average corporate income tax rate has fallen by more than a tenth, from 31.4 percent to 27.8 percent. So without changing rates, VAT and VAT type taxes have become steadily more important to national governments.
This seems to be a trend, but a cautious one, and some commentators have asked why governments do not rely even more heavily on indirect tax revenues. One answer is that higher indirect taxes are politically difficult to introduce. The link between higher indirect taxes and higher prices is obvious to anyone who buys goods and services, but the link between lower corporate tax rates and increased inward investment, with the increased employment and infrastructure development it can bring, is less well understood.
“Governments have a difficult task in communicating the benefits of a low corporate tax strategy, especially if it is combined with higher indirect taxes.” said Mr. Hickey. “It may well be in the long term interests of a country to follow this path, but voters need persuading of the benefits of paying today for a better economy tomorrow.”
Globally, the reduction in corporate tax rates from 2006 to 2007 has been very slight, from 27.2 to 26.8 percent. This is much less than the year-on-year reductions of the 1980s and 1990s.
But some countries have made significant cuts, such as Turkey’s reduction from 30 percent to 20 percent and Bulgaria’s reduction by 5 percent to 10 percent. There are also reductions in the pipeline from Germany, Spain, the U.K., Singapore, China and possibly in France, which should be reflected in future KPMG surveys.
“It might be tempting to say that international tax competition has forced corporate taxes, in Europe particularly, close to their lowest point”, said Mr. Hickey. “But while other sources of revenue remain available, the headline, showcase rate will continue to matter for countries wanting to attract inward investment.
“I think that international corporate tax rate competition has some way to go yet.”
Indian perspective
Commenting on the survey findings Sudhir Kapadia, National Head Tax & Regulatory Services, KPMG India said, "The KPMG Survey clearly shows that world over the tax rates have reduced especially in EU and OECD countries. Further, the survey also shows that other Asian countries’ corporate tax rates are significantly lower than India’s corporate tax rate. For example Hong Kong’s corporate tax rate is 17.5%, Singapore’s corporate tax rate is 20% and Malaysia’s corporate tax rate is 27%. These countries are also in the process of developing their economies and with their lower corporate tax rates can provide stiff competition to India for attracting Foreign Direct Investment (FDI). Further, next year, significant reductions are in the pipeline in the UK, Germany, Spain, Singapore and China.
Therefore, we believe India should post haste implement the Kelkar Committee recommendation of reduction of corporate rates to 30%. This is particularly so as various exemptions under domestic tax laws are being progressively phased out”
From an indirect tax perspective, Subramaniam Harishanker, National Head, Indirect Tax, KPMG, said, "The KPMG Tax Survey 2007 underlines the increasing importanceof indirect taxes as a revenue gathering strategy in many countries with a tendencyamong competing nations to reducecorporate taxes to attract investment and shore up shortfall by either rationalisingor increasing indirect taxes.
OurIndia experience equally underlines the growing importance of indirect taxeswith the introduction of VAT and the stated implementation of GST by April 2010. The significant increase in revenues of States that have implemented VAT, along with the impressive revenue growth of service tax at the Federal level are indicators of growingimportance of indirect taxes as a revenue source across the country. Therefore it is imperative we focus on the implementation of GST by 2010 and rationalise indirect taxes,to avoid multiplicity of taxes,ensure revenues/ complianceand provide a better and sound tax administration."
