Full steam ahead on corporate and indirect tax rate changes around the world

The new economic realities faced by governments around the world mean that significant tax reforms are about to take place. As governments look to recoup lost revenues from the economic downturn, the entire world is in the midst of a period of considerable change with their taxation regimes.

A large number of countries are considering, or are in the process of implementing, substantial reforms of their tax systems.

According to KPMG International’s 2010 Global Corporate and Indirect Tax Survey released today, since 2009 the average global corporate tax has dropped slightly from 25.44 percent to 24.99 percent in 2010. Meanwhile, the average indirect tax rate rose slightly from 15.41 percent in 2009 to 15.61 percent in 2010.

The spread of change is both global and diverse. According to the survey, since 2009, the Africa, Asia, European, North American, Oceania regions all show drops in their average corporate tax rates (29.77 percent to 29.36 percent in Africa, 24.81 percent to 24.44 percent in Asia, 21.70 percent to 21.52 percent in Europe, 36.50 percent to 35.50 in North America, 29.2 percent to 29 percent in Oceania). However, the Latin American region bucked the trend and showed an increase from 26.82 percent in 2009 to 27.87 percent in 2010 largely due to an increase in the Mexican corporate rate from 28 percent in 2009 to 30 percent in 2010.

When it comes to indirect taxes the regions of the world showed mixed results. Africa and North America regions remained flat at an average of 14 percent and 5 percent respectively. The European indirect tax rate rose from 19.29 percent in 2009 to 19.67 percent in 2010 as did the Latin American rate, from 13.63 percent in 2009 to 13.9 percent in 2010 and the Oceania rate, from 11.25 percent in 2009 to 12 percent in 2010. While the Asia region’s average indirect rate has moved slightly down, this is only due to the inclusion of Cambodia in this year’s survey whose indirect tax rate is below average. Otherwise countries within the Asia region have seen their indirect tax rate remain stable or have increased.

 “Next year, the numbers will look much different. We fully expect to see numerous fluctuations as many economies around the world announce tax rate changes that will come into effect in the last few months of 2010 and into 2011,” comments Loughlin Hickey, Global Head of Tax for KPMG International. “The issue for companies is who is best placed to absorb the costs of increased taxes as the worldwide pressures for tax revenues to fund stimulus or tackle government debt will impact them either directly or indirectly. Ultimately, the winners will be those companies that are most efficient in their management of tax compliance and controversy, most effective in accessing stable and competitive tax regimes and incentives, and most trusted in helping constructive dialogue about the role of fair tax policy and administration in sustainable wealth creation so they can make informed choices about the location of activities.”

KPMG International research indicates that indirect taxes will continue rise and corporate rates will continue to lower as evidenced by the many announcements that have been made. According to the KPMG International research more than 17 countries have changed their tax rates—corporate and indirect—since 2009 or have announced their plans for change in their tax rates or regimes in the coming years. For instance, with corporate tax, the UK corporation tax will fall to 24 percent over four years and in New Zealand there will be a reduction in the corporate tax rate to 28 percent from the current 30 percent.

“Whether or not the headline rates have been lowered, authorities in different countries need to consider how to regain lost revenues and defend their own goals against those who are similarly reducing their corporate tax rate to maintain a competitive appearance in the global marketplace,” says Wilbert Kannekens, Global Head of International Corporate Tax with KPMG. “Those companies who operate in multiple jurisdictions will need to be highly aware of the regulations and changes that might occur as well as the change in behaviour and approach of the tax authorities. The risk of double or even triple taxation, meaning profits will be taxed more than one time, has become very real.”

According to KPMG International, indirect tax is one of the more popular ways of gaining back some of the government’s lost revenue – shifting the collection burden to the company rather than the revenue authorities.

 “We are seeing a strong global shift to indirect tax, which will become an area of significant and growing challenge for companies,” says Niall Campbell, Global Head of Indirect Tax Services, with KPMG. “It is quite remarkable to observe the spread of countries contributing to the global shift towards indirect tax. As our report shows, countries with established VAT systems include the UK, Spain, Greece, Finland, Poland, Romania New Zealand, and Portugal have already confirmed and/or executed their plans to increase VAT/GST rates.”

According to the KPMG International research there has also been significant progress in two of the world’s major developing economies, China and India, who are at different stages of the implementation of national VAT/GST systems. Furthermore, the debate in the US has progressed to the extent that consensus is building around the need for a fiscal solution such as VAT.

Similarly, in the Gulf region, increased growth and pressure on governments to provide infrastructure to support growing urban centres, has caused the member states of the Gulf Cooperation Council (GCC) to seriously consider the introduction of a VAT/GST system.

 “Global companies require global tax planning,” concludes Hickey. “It is not enough for a multinational company to adapt separately to each of its local operating environments. To take account of local, regional and national factors – and to thrive – a successful multinational company needs to adapt to all its environments and stakeholders.”

KPMG International’s Corporate and Indirect Tax Survey has been run every year since 1993. It now covers 114 countries. This year’s survey compares corporate income tax rates as at 1 July, 2010 with their equivalent each year back to 2000. The survey also includes information on Value Added Taxes or Goods and Services Taxes in 114 countries, going back six years. Tax professionals from across KPMG’s global network of member firms have contributed to the survey.

UN-backed meeting calls for improved tax collection in poorest countries

Improved tax collection and stronger capital markets form the critical bases for long-term financing for development in the world’s 49 least developed countries, a United Nations-backed meeting of the concerned nations and their partners declared recently.

“Despite significant efforts to mobilise domestic resources and attract more private capital inflows, there is still a huge savings-investment gap in most of the least developed countries,” ministers and economists from the LDCs and their development partners concluded at a meeting in Lisbon hosted by Portugal and the UN office overseeing LDC affairs.

Despite past efforts, LDC domestic savings have stagnated at around 13 per cent of their gross domestic products (GDPs), due to the subsistence nature of much of the economies and rates of extreme poverty which exceed 50 per cent of the populations on average. Ministers therefore focused also on external means of improving resource flows, including through development assistance, private investment, innovative financing and debt relief.

Cheick Sidi Diarra, UN Special Adviser on Africa and its High Representative for the Least Developed Countries, Landlocked Developing Countries and Small Island Developing States, noted that the Lisbon meeting would lay the groundwork for an international action plan to be adopted at the fourth UN global conference on LDCs, taking place in mid-2011 in Istanbul.

 “Domestic resources are sine qua non for self-sustained economic growth and development,” he told the opening session yesterday. “Mobilising domestic resources requires greater domestic savings and investment, higher export earnings, and improved private capital flows, including foreign direct investment.

 “In order to achieve this, LDCs as well as their development partners must adopt a comprehensive approach that optimises the synergies between domestic resource mobilisation, aid, trade, private capital inflows and debt relief.”

Looking to external sources to complement domestic mobilisation, the ministers noted that foreign direct investment (FDI) had been the most rapidly increasing resource flow to LDCs over the past decade, with the source shifting from predominantly developed countries to developing and transition countries.

Along with measures to attract and better utilise this investment and also tap remittances from overseas migrants, the meeting called for a stronger surge in official development assistance (ODA). Less than half of the ODA increase pledged at the previous global conference on LDCs in Brussels in 2000 has been fulfilled.

Critically, both debtors and LDC creditors need to address the current debt burden. Debt service takes up a large part of scarce budgetary resources that could be directed to productive and social areas, and the debt overhang harms the internal and external investment climate.

Despite significant debt relief, the total debt service burden of LDCs has reached $6.03 billion per year.