Competition between countries to attract and keep foreign investment is continuing to drive down corporate tax rates across the world. But initial indications suggest that governments are seeking to make up the shortfall in tax revenues by increasing indirect taxes, which may require companies to shoulder greater compliance and accounting standards.
This is the main conclusion of KPMG International's latest survey which, for the first time, tracks both corporate and indirect tax rate trends, shedding light on the way in which overall tax revenue calculations made by governments affect the relationship between tax authorities and business.
Key findings
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Indirect taxes appear to be playing an increasingly important role in the revenue-gathering strategies of many countries around the world.
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This is a difficult policy for governments to follow because 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 is less well understood.
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This has major implications for companies, their tax strategies and their accounting systems.
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And, of course, the survey gives valuable information on corporate and indirect tax rates around the world.
KPMG says that the Singapore Government in its 2007 Budget announced a two percent cut in corporate tax rates to 18 percent from next year, and an increase in GST (General sales Tax) to seven percent. In Germany, the key VAT rate increased 3 percent to 19 percent on January 1, 2007 and with effect from January 1, 2008 it is intended to reduce the overall tax burden on the income of a corporation to approximately 30 percent .
Singapore retains one of the lowest VAT/GST rates KPMG firms have recorded for this survey. The highest VAT rate is 25 percent, charged by Sweden, Denmark and Norway.
On the level of regions and economic alliances, our research has shown that the average VAT rate in the EU is higher at 19.5 percent than the average in the OECD countries (17.7 percent), in the Asia Pacific countries (10.8 percent) or the Latin American countries (14.2 percent). It is difficult to draw any specific conclusions from this because of the huge number of special rates and exceptions which many countries apply to their indirect tax regimes. But overall, indirect taxes do seem to be taking on more significance.
Globally, average rates have moved down from 27.2 percent last year to 26.8 percent today. This is significantly less than the major year-on-year reductions that were seen in the late 1990�s and early 2000�s.
Of the 92 countries which participated in the corporate tax rate survey this year, 18 lowered their rate and two increased. The fact that the overall global decrease was so slight suggests that most of these cuts were relatively minor adjustments. The major exception was Turkey, which reported a 10 percent cut to 20 percent.
Several significant reductions were in the EU, where seven of the 27 states reported a cut, the largest being Bulgaria which cut rates by five percent to stand at 10 percent. This took the EU average rate to just over 24 percent, 1.6 percent lower than last year. By comparison the OECD's average rate has fallen by less than one percent to 27.8 percent. In the Asia Pacific region, following India's rate decrease in 2006, Malaysia has reduced its corporate income tax rate by one percent whereas Sri Lanka has increased its rate by 2.5 percent. This leaves the region's average rate broadly unchanged at just over 30 percent, although this is likely to change next year when the full impact of China�s planned tax reductions is felt.
Despite a material rate reduction in Aruba of seven percent and smaller decreases in Columbia and the Dominican Republic, the average rate for Latin America has only fallen by 0.5 percent to 28 percent.
