Have developed countries discovered the ideal corporate tax rate?
International tax was once a veritable jungle of exotic regimes, but now many jurisdictions seem to have settled on a natural equilibrium of around 25 per cent, says Tim Sarson
An interesting and rather consequential piece of tax policy from the new German coalition government might have slipped under your radar recently – they are proposing cutting their federal corporation tax rate by five per cent, in phases starting from 2028. By 2032 companies in Germany will be paying roughly 25 per cent in federal and regional taxes on their earnings. “Germany is back”, says the country’s finance minister.
Sound familiar? We have a 25 per cent corporation tax rate too. Only we recently rose back up to that level, while the Germans are heading down to meet us. But whichever direction you’re coming from, 25 per cent seems a rather popular place to be. File your company tax return in Belgium, China, France or Spain and you’re paying 25 per cent. Italy, the Netherlands and South Korea, all within a percentage point or two above or below 25 per cent. The United States, with its federal rate of 21 per cent? Add on state income taxes and it’s in the same range.
So we’ve all converged around a similar headline rate, but maybe the way the tax is calculated is different? For example, here in the UK we have the generous R&D tax credit and the patent box. So do most large, developed economies. There are versions of a patent box in the Netherlands, France, Belgium, Spain and several other locations; most of them also have R&D credit regimes, each with its own quirks but designed to achieve the same effect. Almost all restrict interest deductions based on a measure of company EBIT; almost all also restrict the use of carry forward losses.
What about those famously low tax countries – the likes of Ireland, Switzerland or Singapore, or the ultra-low or zero-tax spots like the UAE and various tropical islands? Something similar is happening there too. Thanks to the global minimum tax – that international agreement known as “pillar 2” which has lately become the subject of much annoyance across the Atlantic, they’ve all been busy implementing so-called top-up taxes that bring their rate up to 15 per cent.
Whatever happened to fiscal diversity?
Some jurisdictions in Eastern and North Europe hover around the 20 per cent mark, and at the other end of the spectrum a few hold outs keep their rates up at the once-normal, now eye-catching levels of 30 per cent and above.
I’ve been working in the international tax world for almost 30 years. It was once a veritable jungle of exotic regimes and obscure incentives and rulings. Each had its unique quirks. The fiscal biodiversity loss since then has been remarkable.
It’s not just in corporation tax that we see this convergence. At the last count 175 countries around the world had a form of VAT on the books, mostly between around 15 and 25 per cent. I just cast my eye over the top rates and average rates of personal income tax across our international peers, and they’re really not that far apart either. The one form of tax where the UK is a bit of an outlier is National Insurance (NI), notably employer’s NI. Even after this April’s hikes were substantially lower than most other rich countries.
All this seems rather against the recent geopolitical run of play. Weren’t we supposed to be moving rapidly apart? You know, Brexit, tariffs, populism, the end of the rules based international order. All those retaliatory measures I wrote about last month.
Or is that noise simply the tyranny of small differences? After all, we share so much with other developed economies: a decade or more of persistent slow growth and stagnation, ageing demographics placing ever-more demands on health and social care provision while the working age population shrinks, and governments trying desperately to balance the need for more tax revenues with the risks of losing competitiveness or removing the incentive for businesses to invest.
Since the financial crisis our public debt to GDP ratio has risen inexorably, so that it now hovers around 100 per cent, but we are far from unique. According to the International Monetary Fund, at the last count France was at 110 per cent, the USA at 123 per cent and Japan, well, Japan’s public debt is up somewhere beyond the tropopause. Of the largest Western economies only Germany has bucked the trend: one reason it can now afford to drop its corporation tax rate into the 25 per cent club.
Could it be that most big countries have divined out through iteration some sort of national laffer curve? My own experience with multinational decision making seems to support this. At 25 per cent, a country’s tax rate is rarely a major influence on location decisions. Not low enough to attract attention; not high enough to put off investors. Other things – like regulation, the domestic market or access to talent become more important. Twenty-five per cent seems to have become a sort of equilibrium level.
The highest tax countries tend to be those with valuable natural resources. The tax rate, sometimes accompanied by strict exchange controls, reflects their strong bargaining position. Metals, crops and hydrocarbons are by definition somewhat less mobile than other forms of capital.
At the other end of the spectrum, when you look down the list of countries that maintain those sub-20 per cent rates you understand why their own calculations might be different: they tend to be smaller, internationally exposed and resource-poor economies that rely more on foreign direct investment than domestic consumption and might struggle to attract attention without something like a low tax rate to wave at the world. Might the UK share some characteristics with that group? Perhaps. But don’t expect any imminent moves down in that direction.
That’s the state of play, then. You have a choice of three rates: roughly 15 per cent, roughly 25 per cent, or 30ish. I don’t expect that to change anytime soon. There is more that unites than divides us, at least when it comes to tax policy.
Tim Sarson is head of tax policy at KPMG