The UK has moved from 3rd to 2nd position in the rankings of ten major countries' tax systems analysed by KPMG International in its biennial 'Competitive Alternatives: Focus on Tax' study (KPMG's Focus on Tax).
This study is a supplement to the 2014 edition of Competitive Alternatives, KPMG’s guide to international business location costs. KPMG’s Focus on Tax assesses the general tax competitiveness of the 107 cities in 10 countries featured in the main research report, with a focus on 51 major international cities. The 10 countries examined are Australia, Canada, France, Germany, Italy, Japan, Mexico, the Netherlands, the United Kingdom, and the United States. It compares the total tax burden faced by companies in each country and city including corporate income taxes, property taxes, capital taxes, sales taxes, miscellaneous local business taxes and statutory labour costs (i.e., statutory plan costs and other payroll-based taxes).
The overall results for all locations are based on average results from 7 different business-to-business service sector operations and 12 different manufacturing sector operations.
Among the countries studied, Canada has the lowest Total Tax Index (TTI*) at 53.6 percent. In other words, total tax costs in Canada are 46.4 percent lower than in the United States, which has a TTI of 100.0 percent and represents the benchmark against which all locations are scored. The United Kingdom, Mexico and the Netherlands also have a TTI score below the United States. At the other end of the spectrum, France’s TTI of 163.3 percent signifies that total tax costs in France are 63.3 percent higher than in the United States.
The TTI rankings of countries in 2014 are broadly consistent with the 2012 rankings among the 10 countries, although the United Kingdom has edged up the table, moving ahead of Mexico to second place with a TTI of 66.6 (an improvement of 6.7 points since 2012). Australia has moved ahead of Germany, but all other countries rank consistently between the 2012 and 2014 standings. France, Italy and Japan also saw significant improvements in their TTI scores since 2012, although not enough to improve their rankings among the 10 countries.
|Rank||Country||2014||2012||% Change||2012 Rank|
UK results by activity
KPMG International calculates the TTI rankings for model businesses in four different sectors in its study. In three of the four, the UK improved its standing. In ‘Corporate Services’, the UK leapfrogged both Canada and Mexico to take the top spot. For both Digital Services and Research and Development, the UK moved from 3rd in 2012 to 2nd (to Canada) in 2014. In manufacturing, all the rankings remain the same since 2012 with the UK sitting in 3rd place behind Mexico and Canada.
Tax policy varies widely by country
KPMG’s Focus on Tax shows that there is no standard approach in setting tax policy among the countries examined. Although the types of taxes used to raise government revenues are more or less similar among countries, there is a huge range in how these taxes are weighted and applied.
Some countries have a tax policy focused on delivering a low corporate income tax rate in order to compete for more businesses. These countries may need to rely more heavily on other taxes, such as sales or payroll taxes, to derive their tax revenues. Similarly, some countries use their tax policies to attract certain types of businesses with targeted incentives for activities such as manufacturing or research & development (R&D). A country’s tax policy choices can significantly affect the tax cost of doing business in that country.
Chris Morgan, head of tax policy at KPMG in the UK, said: “The UK government has been actively pursuing a policy of making the British tax system the most attractive in the G7.This latest survey is more evidence that measures such as reducing the corporate tax rate and introducing targeted tax incentives for specific activities are having an effect. It builds on the annual survey of tax competitiveness we conduct here in the UK in which we question senior tax executives of big businesses operating here about how they view the British tax system. In both the 2013 and 2012 survey the UK was the most commonly cited country when respondents were asked to name their top three most attractive countries from a tax perspective”.
Differences in how taxes are weighted and applied create complexity
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. Variations in how taxes are weighted and applied complicate efforts to compare tax costs effectively and highlight the need to make comparisons based on the complete range of tax costs that apply in each location.
Tax costs vary widely by industry
The overall results for each location combine the results of different types of business operations, and results among the different business sectors vary widely. For companies in service industries, labour costs generally represent a more significant cost factor than for other companies and, so, the impact of statutory labour costs on these companies is more of an issue. Companies in the manufacturing sector are more capital intensive, so the imposition of capital taxes, property taxes, and the frequency of tax incentives for manufacturing activities are more important in this sector.
Tax costs vary more widely than most other costs
In the main Competitive Alternatives 2014 study, KPMG International noted that taxes (excluding statutory labour costs) typically represent up to 14 percent of location-sensitive costs. This cost is lower than other main business costs, such as labour (44 – 90 percent of location-specific costs), facilities (2 – 16 percent) and transportation (7 – 24 percent). However, while taxes do not comprise the largest portion of total costs, tax costs can vary greatly between locations.
Jane McCormick, Head of Tax and Pensions at KPMG in the UK, concluded: “Tax is an important area that businesses analyse when determining where, in our global economy, to make their investments. The variety of approaches to taxation is significant, and the combination of these taxes on business in each country becomes a very critical factor in determining the competitiveness of a country to global business.”
Notes to editor
The tax rates used in this study are those in effect as at January 1, 2014. Tax calculations over the 10-year analysis horizon incorporate future tax changes announced on or before January 1, 2014, that will come into force during the next 10 years.
*Total Tax Index (TTI) is the primary measure used in this study to compare tax burdens by comparing the total actual tax cost (in US dollars) for each jurisdiction. For calculating income taxes, net income before income tax has been standardised as a fixed dollar amount in all locations, so that total taxes paid can be realistically compared in absolute dollar terms.
To access the full report, please visit www.competitivealternatives.com.
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About KPMG International
KPMG is a global network of professional firms providing Audit, Tax and Advisory services. We operate in 155 countries and have more than 155,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.
This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.