Corporate tax rates have been steadily falling for a decade in many countries while value added tax and goods and services tax (VAT/GST) systems have proliferated across the globe, rising each year to higher rates and applying to more items as indirect tax systems mature.
Some commentators have wondered if these dual trends were temporary anomalies that would reverse over time. Based on our reading of this year’s survey results, the chance of a return to the pre-2000 status quo is remote and the global re-balancing of corporate and indirect taxes will continue. International businesses should ensure they have the right mix of income tax and VAT/GST management resources in place to stay ahead of this long-term trend.
Corporate tax cuts about to hit bottom
The world’s average corporate tax rate has fallen in each of the past 11 years, from 29.03 per cent in 2000 to 22.96 per cent in 2011. Rwanda’s corporate tax rate is currently at 30 per cent.
Regionally, we see that the Asia Pacific region average rate went from 23.96 per cent in 2010 to 22.78 per cent in 2011. The Latin America region went from 25.33 per cent in 2010 to 25.06 per cent in 2011. North America went from 23.67 per cent in 2010 to 22.77 percent in 2011. Oceania went from 24.17 per cent in 2010 to 23.83 per cent in 2011 while Europe was the only region where we saw a slight increase – from 19.98 per cent in 2010 to 20.12 per cent in 2011 as the Africa region remained flat. Based on these results, it seems certain that the decade-long era of sharply declining corporate tax rates is almost behind us.
Average indirect tax rates at the global level have been stable, hovering at or near the 2011 average of 15.41 per cent for the past three years. Rwanda VAT rate is currently at 18 per cent. Excluding the countries that do not charge VAT/GST, we find that the Africa region saw its average VAT/GST rate rise from 13.91 per cent in 2010 to 14.17 per cent in 2011, while the average rate in Asia rose from 11.64 per cent in 2010 to 11.73 per cent in 2011. Oceania’s average rose from 12 per cent in 2010 to 12.5 per cent in 2011.
Latin America bucked the trend, if only slightly, by dropping from 13.90 per cent in 2010 to 12.78 per cent in 2011 while Europe saw its average VAT rate rise slightly from 19.67 in 2010 to 19.71 per cent in 2011.
Europe’s average VAT rate has hovered around its current rate for the past six years. The region’s relatively high but stable average bears out a common pattern. New VATs are usually introduced at lower rates, but as business and consumers come more conditioned to accepting them, VAT rates tend to climb and the goods and services to which they apply tend to expand.
Europe’s VAT systems are among the world’s most mature, and so its relatively high average rates are not surprising. As we note below, however, a country’s headline VAT/GST rates is only a starting point for comparing indirect tax costs in different countries.
Governments are increasing their reliance on VAT/GST systems for economically sound reasons. Compared to income taxes, VATs are less affected by economic ups and downs and thus more stable, their revenue bases are less mobile, and their real-time collection provides a steadier revenue stream.
But political concerns drive tax policy as much or even more than economic ones. In many countries, the policy reasons for cutting corporate taxes are purportedly based on making the country more competitive to foreign investment. Debates on the issue are quick to polarize, with those promoting a country’s ability to compete lining up against those wanting to ensure that big companies pay tax on their profits.
As the end of the decade-long trend approaches, year-over-year corporate tax rate cuts have become much smaller. This suggests that many countries believe they have achieved competitiveness and that public opinion will not support any more sharp declines. By continuing to promote smaller corporate tax cuts, however, today’s governments can attract investors with promises that would have only minimal budgetary impact if implemented. Reducing income based taxes, including corporate income taxes, can have other political and competitiveness implications. These shall be discussed in the next article.
Angello Musinguzi is a Tax Manager at KPMG Rwanda
E-mail: firstname.lastname@example.org / Tel: