Real-time taxes take hold worldwide as corporate tax rates continue to fall
September, 11th 2008
The FINANCIAL -- According to KPMG, tax rates on corporate profits have continued their long decline in the past year, but governments worldwide are increasingly looking to taxes on goods and services to make up shortfalls in public revenues, with profound effects on business.
106 country survey shows no rises in corporate tax rates for first time in 14 years. But wider tax base and tougher enforcement mean indirect taxes take on new global importance.
Tax rates on corporate profits have continued their long decline in the past year, but governments worldwide are increasingly looking to taxes on goods and services known as real-time taxes to make up shortfalls in public revenues, KPMG Internationals latest annual survey of tax rates affecting business has found.
For the first time since 1994, not one of the 106 countries covered by the survey has raised its main corporate tax rate in the past year.
The global average corporate tax rate stands at 25.9 percent, down just under one percent year-on-year. Lowest average corporate tax rates are still found in the European Union (EU), where the average rate has fallen by one percent since 2007 to stand at 23.2 percent. Highest average rates are in the Asia Pacific region where rates fell by 0.8 percent to stand at 28.4 percent.
Globally, the average indirect tax rate is 15.7 percent, with little movement over the past five years. But average indirect taxes in the EU (goods and services tax (GST) or value added tax (VAT)) are the highest in the world at 19.49 percent. In the Asia Pacific region they are the lowest at 11.14 percent, but the average rate here has risen by 0.5 percent since 2006.
For several years there have been signs that governments throughout the world have been switching their attention to indirect taxes, but this year that trend has become much clearer, said Niall Campbell of KPMG in Ireland, KPMG's Global Head of Indirect Tax Services.
We are seeing this in three key ways. First, indirect tax rates on the whole have not changed, while corporate tax rates have been pushed steadily down. Second, more and more governments are introducing indirect tax systems there are currently 135 countries with these systems in place and more in the pipeline. And third, there is a steady expansion of the transactions that these taxes are applied to and a new focus from tax authorities on efficient collection of indirect taxes.
This process is especially clear in the Asia Pacific region. Singapore raised its indirect tax rate from five percent to seven percent last year, and is in the process of extending its GST Compliance Assurance Programme to all businesses making annual GST supplies of S$1 billion (US$740 million) or more. This programme involves visits by specialist revenue authority officers to large businesses to assist with issues of GST accounting, record keeping and reporting.
At the same time, India is in the process of merging its state-based indirect taxes as a prelude to introducing a country-wide GST by 2010.
In the EU as well, companies are seeing both regulatory changes and government action to tighten up enforcement. In Germany, for example, a pilot scheme is currently underway in one state to put VAT regulation in the hands of specialist offices. This is likely to be rolled out to the rest of the country.
In a world where companies and their profits are increasingly mobile, taxes on consumption present a source of revenue that few governments can resist. They draw on the whole economy, rather than just on corporate profits, offer a steady stream of income rather than large sums at widely spaced intervals and are collected much more rapidly after they have fallen due than corporate taxes. said Mr. Campbell.
We are seeing a worldwide move to real-time taxes, which demands that tax departments have a real-time view of what is going on in their companies, with a far greater level of insight into transactions and related tax processes than many enjoy today.
Although international competition is still forcing corporate tax rates down, there are signs that governments are tightening up enforcement in this area as well.
One of the most active new areas of tax regulation is transfer pricing, where an increasing number of countries are introducing rules to regulate the prices at which companies in the same international group buy from and sell to each other across borders.
In India, for example, the government has adopted a tough attitude to companies using the countrys low tax base to improve profit margins elsewhere in the world. Indias tax authorities insist on assigning high profit margins to the Indian operations of foreign companies, because of their belief that location savings generate significantly higher profits than companies would earn if they were based in another country.
There is an obvious tension here between the undoubted economic benefits to all of more efficient supply chains and freer trade, and the need for governments to secure their revenues. said Wilbert Kannekens of KPMG in the Netherlands, KPMG's Global Head of International Corporate Tax.
Tax professionals are right in the middle of this dilemma. They need to be able to promote the benefits of efficient cross-border trade to governments and to help develop the new fiscal policies these countries will need if they are to win their share of global wealth.
Taken together with the much greater degree of oversight demanded by the new tax systems emerging around the world, this is why we believe that the need for a forward-thinking, value-orientated global mindset in corporate tax matters is greater now than ever before.