By Jim Martin, Tax Manager, UHY Haines Norton, Email firstname.lastname@example.org
In an increasingly globalised world, governments are under pressure to find ways to attract and retain businesses to their country and then to help those businesses compete against their international competitors.
An increasing number of government’s now realise that one powerful tool they have to achieve those goals is lowering the level of corporation tax that they impose on business profits.
Clearly a high corporation tax rate can make one business location unattractive compared to overseas economies with lower tax rates. A high corporate tax rate can also suppress a corporate’s growth by taking money out of a business and its shareholder’s pockets that could alternatively be invested in marketing or R&D to further grow the business.
The latest research project from UHY’s international network has found that some developed nations are still dragging their economies down and hitting businesses with far higher corporation tax rates than faster growing emerging economies.
On taxable profits of USD 1,000,000 governments of the G7 economies take an average of 32.6% of corporate profits in tax, compared to an average of 30.3% in the BRIC economies and an average of 26.8% for all countries in the study.
New Zealand falls at the higher end of the scale, taking 28% in tax, which puts extra pressure on businesses in New Zealand.
Of course, a number of factors can affect how attractive a country is to businesses: different tax reliefs might be available; infrastructure matters; red tape and regulation plays a role; and some countries benefit from already being ‘hubs’ for certain industries.
Businesses in New Zealand do benefit from tax relief such as: no Capital Gains tax and no Business Payroll taxes, for example. However, the headline corporate tax rate can send a clear signal that a government is ‘business-friendly’.
Cutting the headline rate rather than introducing new tax reliefs has several benefits. Firstly, all businesses can enjoy a lower tax burden if the overall rate is cut. Secondly, fewer tax reliefs mean less complexity in a tax system, reducing tax compliance costs for businesses and reducing the likelihood of business disputes with tax authorities.
Competition between countries on corporation taxes ensures governments are constantly trying to find ways to make doing business in their economy easier.
Some major economies have already taken steps to reduce their corporation tax rates, including the UK, Canada, and Japan – although Japan’s rate still remains far higher than other economies.
This puts pressure on emerging economies to cut their already low rates to ensure that their competitive advantage is not undermined.
New Zealand has work to do to make sure it does not fall behind other countries cutting their rates.
Governments around the world have a difficult balancing act to pull off. Low corporate taxes might mean higher taxes elsewhere in the system such as higher capital gains taxes or specific taxes on increases in land values that have received valuable development approvals.
However the balance is found, it’s vital that governments do find one. Businesses, and the jobs they bring, are highly mobile, and it is difficult to make a case for operating in a high tax country when the business can get a better deal elsewhere.
To read the full International Corporation Taxes study, click here.