Some developed nations are still dragging their economies down with far higher corporation tax rates than emerging economies, according to research by UHY, the international accounting and consultancy network.
On taxable profits of € 760,000 (USD 1,000,000), the G7* group of developed economies takes an average of 32.6% of corporate profits in tax, compared to an average of 30.3% in the BRIC** economies.
Ladislav Hornan, Chairman of UHY, says: “Corporation taxes are a significant burden for businesses, and that burden is far higher in developed economies than in emerging markets. High corporation taxes mean businesses in developed economies cannot compete on a level playing field, suppressing growth in economies that are already struggling.”
“The low corporation tax rates in emerging markets or lower-tax economies mean businesses can plough much more of their profits back into business or product development. More investment and lower costs can give businesses in places like China a competitive advantage on price and product quality when it comes to exporting to developed economies or competing with imports.”
Ladislav Hornan adds: “The benefits of being based in a developed economy – better infrastructure and well-established supply chains – count for less and less as emerging economies improve their infrastructure, tax systems, and business communities.”
“As emerging economies catch up to developed economies, the disadvantages of developed economies – more red tape and higher taxes – increasingly stand out. Without action on the kinds of things that suppress growth, such as overly complex regulation or high taxes, businesses based in developed economies will begin to look closely at relocating.”
UHY tax professionals studied tax data in 26 countries across its international network, including all members of the G7, as well as key emerging economies. UHY calculated the corporation taxes due on taxable profits of € 76,000 (USD100,000) and €760,000 (USD1,000,000).
UHY says that, of the countries included in the study, Japan charges the highest taxes on corporate profits of € 76,000 (USD 100,000) (43%). The UAE charges no tax on corporate profits, while the Irish government takes just 12.5% of corporate profits in tax.
Max Gosch, Managing Director of the Madrid office of UHY Fay & Co, comments: “Japan, Canada, and the UK have all recognised the importance of cutting the headline corporation tax rate, with each country cutting their rate in the last year – although Japan still has the highest corporation tax rate in the G7.”
“Cutting the headline corporation tax rate rather than trying to boost competitiveness through introducing new reliefs has several advantages for both business and government. Introducing new tax reliefs will benefit some businesses, but they introduce added complexity to the tax system. This creates new burdens for businesses as they work out which reliefs they can and can’t qualify for, and it creates scope for disputes with tax authorities.”
“Businesses will base their decision on where to have their tax base on a range of factors, but cuts in the headline corporate tax rate can send a strong, clear signal to businesses that a government is ‘business-friendly’.”
Recent UHY studies have found G7 countries lagging behind BRIC countries on a range of business and tax burdens.
One UHY study in 2012 found that G7 countries took an average of 29.7% of their GDP in tax, while BRIC countries took an average of 27.7%.
An earlier 2013 study on employment taxes found that G7 employers paid an average added 23.8% of an employee’s € 57,700 (USD 75,000) salary in social security contributions, compared to 22% for an employer in a BRIC economy.
Roisin Duffy, Tax Director at UHY Farrelly Dawe White Limited in Ireland, a member firm of UHY, says: “Despite the difficult financial situation the government is in, it has fought hard to maintain a very low headline rate of corporation tax. This is a major factor in helping attract and keep major global companies like Google and Facebook in Ireland.”
Andrea D’Amico of FiderConsult Srl, member firm of UHY in Italy, says: “Italian businesses are struggling under a high tax and regulatory burden. Whether it is employment taxes, taxes on profits, or bureaucracy, Italy does not compare well to either developed or developing economies. While the Italian corporate tax rate is around 30% in theory, companies may end up paying far higher taxes because of the way the tax system works. It’s important that the Government take urgent measures to address this. Cutting the headline corporate tax rate would be a step in the right direction.”.