Global average top rate of income tax declines very slightly as government responses to economic crisis vary largest number of changes to top rates of personal income tax seen in Europe with Western Europe remaining the region with the highest average globally at 45 percent and competition on tax goes global with main competition on personal tax rates for British senior executives no longer so much between the UK and other European countries but between Western Europe and Asia.
The UK has the 4th highest top rate of personal income tax in the EU, according to the latest KPMG International Individual Income Tax and Social Security Rate Survey.
With a top rate of 50 percent, the UK shares its 4th position in the EU league table with Belgium and Austria, with only Sweden, Denmark and the Netherlands imposing higher rates. The UK is above the EU average of 37 percent and the Western European average of 45 percent. Globally, among the 96 countries surveyed, only five had rates equal to or above the UK’s 50 percent with Aruba topping the table with a top rate of 59 percent and Japan being the only other country outside Europe with a rate of 50 percent.
Marc Burrows, Head of International Executive Services at KPMG, commented: “With doubts around what the 50 percent top rate of tax is actually yielding, is the highest top rate of personal tax really a table that we want the UK to top? Headline rates matter as they are what everyone notices. Our analysis shows that if you take into account the effect of social security taxes and the thresholds at which the top rates kick in across different countries, the UK comes out a bit better but in practice very few people actually look at that.”
Competition shifts to between regions not countries looking beyond the UK, and across the world, as global economic turmoil continues, competition on tax is shifting from a country versus country within region basis to entire regions competing against each other with the Western Europe average of 45 percent increasingly being compared to Asia’s at 23 percent, according to the KPMG survey.
Marc Burrows commented: “Truly globally mobile international executives move around the world and tend not to stay in one region. They are not weighing up London against Dublin or Geneva but looking at Hong Kong, Singapore, Dubai, all around the globe. And on this scale, nowhere in Western Europe is particularly attractive with an average of 45 percent comparing with 23 percent in Asia where Hong Kong is at 15 percent and Singapore at 20 percent. As the global economy reshapes itself post crisis, most expect the balance to shift towards the East. The tax trends would appear to support this view.”
Marc Burrows concluded: “As most countries continue to try to achieve the right balance on tax to increase overall net revenues, one can expect diverse approaches via personal income tax rates and other taxes. Despite personal tax rate discussions being high profile this year, most countries remain effectively in a holding pattern with respect to change. However, while governments may not move, individuals, particularly higher earners, continue to do so and this should not be overlooked when addressing deficit concerns.”
Detailed Global Analysis
The KPMG 2011 International Individual Income Tax and Social Security Rate Survey found that, while governments around the globe are seen to be using tax policy and rates to stabilise their revenue base due to changes in their economies less than 15 percent of 96 countries from around the world recorded any change in personal income tax rates, and not a single G-20 member reported a change to its top personal income tax rate. In contrast, the 2010 survey saw more than twice as many rate changes than this year and four G-20 members reported updates. In 2011, Spain is the only economy (defined by GDP) within the world’s top 20 economies surveyed that had a change in top personal income tax rate.
“Though personal tax rate discussions have been high on the agenda in 2011 as many economies continue to address debt concerns and walk a tightrope between further recovery and downturn, these discussions have not translated into a lot of rate changes – particularly in the larger economies,” commented Marc Burrows.
Changes Mostly Seen in Europe
Although there are some significant differences among the sub-regions, the vast majority of rate movement in 2011 comes from the Europe region. The average rate for Eastern Europe at just over 17 percent is less than half of that of other European sub-regions. This is a result of the historical low flat tax initiatives.
In 2011, the relatively low Eastern Europe rate distinction was emphasised with Hungary slashing their top personal tax rate from 32 to 16 percent and adopting a flat tax rate system. In Southern Europe, where the average rate approaches 39 percent, tax rate increases were seen in Spain and Portugal. Spain created new tax brackets for higher income earners, raising rates at the top end by 2 percent so that income over EUR175,000 is now subject to a 45 percent rate. Portugal raised rates, albeit at a lesser level, for the second year in a row.
In Northern Europe, where the average rate approaches 40 percent, minor tax rate changes are seen in Latvia, Finland, Sweden, Iceland and Ireland. Latvia dropped its flat tax rate by 1 percent. Variances on the municipal front resulted in small combined rate changes in Finland, Sweden and Iceland. Ireland, which initiated the upward rate movement trend back in 2009, raised rates for the third consecutive year (a 1 percent increase in 2011) as it continues to seek additional tax revenues.
Western Europe, where the average rate is over 45 percent, continues to have the highest personal tax rates of any sub-region globally. Within the Western European sub-region, an attractive personal tax rate environment remains effectively limited to certain cantonal pockets within Switzerland. Luxembourg is the only country in Western Europe which had a rate change in 2011. Under pressure to reduce its budgetary deficit, Luxembourg responded by increasing the top personal income tax rate, raising the unemployment surcharge for high income earners and introducing a crisis contribution tax. When combined, these measures have effectively increased the top personal tax rates by approximately 3 percent. Very little activity elsewhere, within the Asia region and its diverse sub-regions, the only rate change is seen in Jordan which implemented an 11 percent decrease in rates. For the Asia region the average rate remains at just over 23 percent.
The economic powers of China, India and to a lesser extent South Korea showed no change in rates. The personal tax rate competition between Hong Kong and Singapore remains but to date there has been no change in fundamental state of play.
For the Latin America and Caribbean region, where the average rate remains at just over 28 percent, the only rate change is seen in Jamaica which reverted back to 2009 levels after a temporary 10 percent increase. In the regions of Africa (average rate of 27 percent), Oceania (average rate of 38 percent) and North America (average federal rate of 27 percent), highest rates of personal income tax remained static in 2011.
In terms of the highest income tax rates in the world, the small Caribbean island of Aruba (a new participant in the survey) took this accolade with a rate of 59 percent. Other countries with top personal income tax rates at 50 percent level or higher included perennial countries like Sweden (57 percent rate), Denmark (55 percent rate), Netherlands (52 percent rate), Austria (50 percent level), Belgium (50 percent rate) and the United Kingdom (50 percent level).
Marc Burrows comments: “The UK’s increase to the 50 percent rate occurred during 2010 and the change remains a headline item in 2011. The only G-20 country with a rate of 50 percent or higher outside of Europe is Japan.”
The survey also highlights taxable income levels where top rates take effect.
Social Security Implications
KPMG International’s broader analysis comparing both effective income tax and social security rates on USD100,000 and USD300,000 of gross income emphasises the point that other taxes and the impact of deductions clearly need to be considered. The UK for example has a top rate of 50 percent but the withdrawal of the personal allowance on income over £100,000 produces a marginal tax rate of 60 percent or 62 percent when social security is included. Effective rates are derived by taking total taxes over gross income prior to any deductions (which may include social security) to allow for better comparison as deductions can vary greatly across countries. While Aruba and Sweden are at the higher end of each scenario, they do not actually have the top rate. Using a USD100,000 basis for example, Belgium, Croatia and Greece all have significantly higher combined effective personal income tax and employee social security rates ranging from over 43 percent up to almost 48 percent. The UK in contrast is just over 30 percent. The primary difference is social security.
“Whether social security is a true tax may be debated, but in terms of cost, it can be material,” says Marc Burrows. “Therefore in our survey we include a review of both the employee and employer contributions. Social security components can vary significantly including by country, employer and employee type. Here in the UK a KPMG poll of employers suggested that over 90 percent would welcome a move to align income tax and national insurance contributions (NIC). But simply abolishing NIC and increasing the tax rate, even if it was politically acceptable, would make the UK tax system appear uncompetitive. For example, at the current rates the resultant basic rate of tax would be 32 percent (i.e. 20 percent plus 12 percent employee NIC). This is high in comparison with tax rates in other countries i.e. Italy where the current tax rate is 23 percent. In reality of course this is not a fair comparison as social security is also payable in Italy in addition to the 23 percent tax rate but individuals notice the headline rate.”
While restricting the review to recognised core contribution requirements for employees earning gross income of USD100,000 and USD300,000, the results show France has the highest combined employee and employer social security rate at over 50 percent under either scenario. Belgium is the next highest at 48 percent.
Marc Burrows notes: “While these rates may seem exceptionally high, over one-third of the countries within our review had combined employer and employee social security-based effective tax rates of above 20 percent on USD100,000 of gross income. With current and future increased demands on the social security infrastructures of many countries from around the world, we expect further stress, on many already fragile systems, to continue. Given that many countries have ageing populations and economies that are still dealing with recovery with an uncertain future, the social support schemes are as important now as ever.”
About the survey
KPMG’s Individual Income Tax and Social Security Rate Survey 2011 is a cross-border survey of personal tax and social security rates with historical data from 2003-2011. The report covers 96 countries, concentrating on the highest level of personal tax payable to the central government. For ease of comparison, the survey has excluded, where possible, other taxes such as state and municipal taxes.
The study was commissioned by the global International Executive Services practice, comprising professionals from several KPMG International member firms.
A copy of the survey is available at: http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Pages/KPMGs-Individual-Income-Tax-and-Social-Security-Rate-Survey.aspx
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This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.