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Corporate Tax Rate Survey 2006 4

Balancing the government books

Conspicuously low headline tax rates can help a country to increase, or at least to maintain, revenue if they expand the tax base (attract additional investment) sufficiently to offset the revenue effects of those low rates. This becomes less effective, however, as other countries begin to employ competitive rate-cutting to defend their own tax bases.

The progressive lowering of trade barriers particularly in the EU, and the increasingly sophisticated supply chain options available to large, global companies provide credible alternatives for locating investments so exerting constant downward pressure on headline rates.

But although important, economically and symbolically, statutory corporate income tax rates are not, of course, the only considerations for companies seeking low tax jurisdictions. A low tax rate does not necessarily mean a low tax burden. An apparently high tax jurisdiction can be attractive for investment if its effective rate is significantly lower than its statutory rate.

Other tools in government armories include special regimes for particular types of investment, such as headquarter companies, treasury companies and research and development, and shifting the burden to indirect taxes. More subtle competitive variables include the attitude of governments and their tax authorities to corporate tax payers, ranging from aggressive policing to promoting business collaboration; tax certainty or the lack of it (deriving from such factors as complexity of tax law and the availability of binding agreements) and the efficiency or otherwise of tax administration and the costs it imposes on tax payers. In time as tax competition progressively erodes differences in rates, such factors are likely to assume more importance and one of the keys to tax competitiveness could become the “business friendliness” of a nation’s tax environment.

For the moment, factors to consider other than headline rates when gauging the corporate tax burdens of particular jurisdictions include:

  • Indirect taxes

  • Other financial inducements for domestic investment

  • The sophistication of tax law.

© 2006 KPMG International. KPMG International is a Swiss cooperative of which all KPMG firms are members. KPMG International provides no services to clients. Each member firm is a separate and independent legal entity and each describes itself as such. All rights reserved.

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