UK’s Tax Competitiveness Most Improved Among Major Economies in Past Two Years – KPMG

Michelle Remo, “Big 4″ observer
September 26, 2012 /

Over the past two years, the UK’s tax competitiveness has improved the most among major economies examined in a study conducted by KPMG International.

KPMG’s Competitive Alternatives 2012, Special Report: Focus on Tax, assesses the impact of all business taxes in 14 countries worldwide, building on data compiled for ten countries in 2010.  Comparing this year’s results with the scores two years ago shows that the UK is the most improved.

The taxes analysed include corporate income taxes, capital taxes, sales taxes, property taxes and statutory labour costs to calculate a “total tax cost” which is compared between countries and cities using a Total Tax Index (TTI) for each location. The TTI is a measure of the total taxes paid by corporations in a particular location, expressed as a percentage of total taxes paid by corporations in the US. Thus, the United States has a TTI of 100.0, which represents the benchmark against which the other countries and cities are scored.

The lower the TTI, the more attractive the country from a business tax perspective.  Overall, the UK was ranked 6th most attractive, ahead of the United States and all European countries analysed, with its score improving by almost 15 percentage points since 2010.

Rank

Country

Total Tax Index

 

 

2012

2010

Change

2010 Rank 1

1

India

49.7

n/a

n/a

n/a

2

Canada

59.1

63.9

-4.9

2

3

China

59.7

n/a

n/a

n/a

4

Mexico

63.6

59.9

3.6

1

5

Russia

71.7

n/a

n/a

n/a

6

United Kingdom

73.3

88.0

-14.8

5

7

Netherlands

77.2

76.4

0.8

3

8

United States

100.0

100.0

0.0

6

9

Germany

122.0

124.1

-2.1

7

10

Australia

125.1

80.8

44.3

4

11

Brazil

142.6

n/a

n/a

n/a

12

Japan

152.3

138.0

14.3

9

13

Italy

152.9

129.6

23.3

8

14

France

179.7

181.4

-1.7

10

1.      India, China, Russia, and Brazil were not examined in the 2010 study.

Subsequent to the completion of research and analysis for this report, in March 2012 the Canadian government announced a reduction in its R&D tax credit program to commence in 2014. This change will impact TTI results for Canada in future editions of this study.

Chris Morgan, head of tax policy at KPMG in the UK, said:  “This is good news for UK Plc and an endorsement of the Government’s tax policy. The significant change for the better is partly due to reductions in the corporate income tax rate here in the UK (which has reduced by 2 percent since 2010) as part of the Government’s stated objective of the having the lowest corporation tax rate in the G20. It is also due to lower industrial property values in 2012 which have resulted in a reduced burden for other corporate taxes.

Chris continued: “Things are definitely moving in the right direction.  On the positive side there are developments such as the new ‘controlled foreign companies’ rules, which make it far more attractive to locate international businesses here, and the patent box regime, under which profits deriving from patents are taxed at a very attractive rate of just 10 percent.  However,business still has some concerns on tax.  It is far from clear how the proposed new general anti-abuse rule will operate for example. As currently drafted it could impact genuine commercial transactions which are implemented in a tax efficient way. Also, despite the reducing headline rate of corporation tax, some businesses operating in capital intensive industries have been left worse off in terms of the effective rate of tax they pay because the overall rate reduction is offset by the loss of ‘Industrial Buildings Allowances’ and the reduction in the general rates of capital allowance.  They would very much welcome any move to restore some sort of allowance for capital expenditure, especially in key industries such as infrastructure and manufacturing.”

Manchester and London compared

The total tax burden can also vary from city to city within the same jurisdiction. The survey, which compared 113 cities from 14 countries, found that the tax burden spread between Cincinnati and San Francisco, for example, exceeded 25 percent; and the spread between Osaka and Tokyo was more than 20 percent, while the spread between Amsterdam and Rotterdam was a mere 0.5 percent.  In the UK, the survey examined Manchester and London.  Manchester was given a TTI of 66.7, some 13 points lower than London.  The difference was largely due to lower rates for “other corporate taxes” and “statutory labour costs” which are both based on actual business costs that would be incurred in the location and thus reflect the relative costs of labour and property values between Manchester and London.

 

Effective Tax Rates

 
  Corporate Income tax Other corporate taxes Statutory Labour Costs Total Effective Tax Rate TTI
Manchester 17.4% 6.8% 16.6% 40.8% 66.8
London 16.9% 11.6% 20.3% 48.8% 79.8

Source: KPMG’s Competitive Alternatives 2012, Special Report: Focus On Tax.

UK’s R&D regime ranks highly but slips behind the Netherlands and new entrant, India

The TTI rankings of countries for R&D operations vary significantly from the overall results, primarily due to the impact of tax incentives targeted to foster R&D activity.

The UK, Canada, India, the Netherlands and Russia all have particularly low TTI ratings, at less than 65, reflecting the effect of significant R&D incentives in those countries.  However, within this group, the UK slipped back slightly, as the Netherlands nudged ahead in this year’s rankings and India (surveyed for the first time in this study) was a new entrant in second place.

David Woodward, head of R&D Tax Relief at KPMG in the UK, remarked: “It’s good that the UK scores highly but it is concerning that we have fallen behind the Netherlands and also that new entrants, India and Russia make their debut so high on the chart.

“There’s clearly no room for complacency on R&D tax for the UK, with many countries reviewing their regimes or introducing new ones.  It’s important that the ‘above the line’ R&D tax credit (a regime that will turn a credit buried in the tax computation into income the business can see) is brought in as soon as possible as this should significantly enhance the attractiveness of the UK’s R&D tax regime and hopefully help keep us at the top end of the table.”

Rank

Country

Total Tax Index

for R&D tax regime

2010 Rank for R&D tax regime

1

Canada

29.0

2

2

India

47.0

n/a

3

Netherlands

57.8

4

4

United Kingdom

63.2

3

5

Russia

63.9

n/a

6

Mexico

78.7

5

7

China

88.6

n/a

8

United States

100.0

6

9

Australia

135.5

1

10

Germany

143.5

9

11

Japan

155.8

8

12

France

157.6

7

13

Italy

233.3

10

14

Brazil

266.0

n/a

 

The global picture: India, Canada and China top the list: 

Looking beyond the UK results for a more global view, it seems the emerging markets offer more than just growth potential; they also offer some of the lowest tax costs. According to KPMG’s research, companies located in India pay about 50 percent less in tax costs than their peers in the United States. Indeed, of the five countries with the lowest total tax costs, four are emerging markets: India, China, Mexico and Russia.

“While companies often use a country’s corporate income tax rate as a proxy for overall tax costs in a location, this rate does not tell the whole story,” said Greg Wiebe, KPMG’s Global Head of Tax.  “Once all of the other various taxes and incentives are taken into account, companies could find themselves facing a much higher tax burden than they had originally expected.”

Among 14 major countries surveyed, outside of the emerging markets only Canada (ranked second), the United Kingdom (ranked sixth) and the Netherlands (ranked seventh) offer lower total tax costs than the United States. Higher tax costs seem to prevail in parts of Europe (Germany, Italy and France) and Asia Pacific (Australia and Japan). But Brazil stands out as an enigma: the country is widely recognised as a top emerging market, yet its total tax costs are around 43 percent higher than those of the United States.

Tax Competitiveness – 2012 Rankings by Country:

Rank

Country

Total Tax Index 2012

   

1

India

49.7

2

Canada

59.1

3

China

59.7

4

Mexico

63.6

5

Russia

71.7

6

United Kingdom

73.3

7

Netherlands

77.2

8

United States

100.0

9

Germany

122.0

10

Australia

125.1

11

Brazil

142.6

12

Japan

152.3

13

Italy

152.9

14

France

179.7

   

Source: KPMG’s Competitive Alternatives 2012, Special Report: Focus On Tax.

 

“Tax rates are frequently changing – particularly in this era of fiscal crisis – and tax authorities are now hunting for opportunities to improve their tax take through the use of indirect taxes and other taxes, including raising corporate taxes. In an era of global competitiveness, raising corporate tax rates may create immediate and longer-term negative consequences to corporate investment,” added Greg Wiebe.  “Companies need to seriously consider how these different taxes impact their operations and assess the full weight of taxes for which they may be liable.”

Overall, the changes in Total Tax Index (TTI) for all countries are the product of a number of factors, including:

Changes in tax rates, with decreases in corporate income tax rates being the most common theme across recent tax changes

Incentive changes, including expired incentives in Italy and revised incentives in Australia

Exchange rate changes, including the significant appreciation of the Australian dollar and the Japanese yen, as well as the depreciation of the Euro and Pound over the last 2 years.

Lesser factors, including changes in underlying business costs in each location (e.g., property values and labour rates).

“The bottom line here is that – while tax authorities may be looking to increase their tax take – companies seem increasingly willing to relocate their operations in order to take advantage of lower costs, including the tax burden,” Greg Wiebe concluded.

The analysis is based on cost information collected primarily between July 2011 and January 2012. Taxes reflect tax rates in effect on January 1, 2012, and also incorporate any announced changes at that time to take effect at specified later dates. Tax rates and other tax-related information are also subject to further change as a result of new legislation, judicial decisions, and administrative pronouncements. Of course, exchange rates and other cost factors will change over time.

 

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