Need to boost tax bases checks fall in corporate rates: KPMG survey

THE global crisis has forced governments worldwide to reassess their tax policies. Where once they focused on cutting corporate taxes to lure investment, the need now to shore up their tax bases has slowed the fall in corporate tax rates.

These are the findings of KPMG's 2009 Corporate and Indirect Tax Rate Survey, which covered more than 116 countries, including 20 in Asia.

It found the long-term slide in tax rates applied to company profits in Europe and Latin America has come to a halt this year.

Only in the Asia-Pacific region has the average rate cut this year matched the cuts of previous years, falling from 28.4 per cent in 2008 to 27.5 per cent in 2009. Singapore's corporate tax rate ranked third-lowest of 20 Asia-Pacific countries surveyed.

The rest of the world - in an urgent bid to boost revenue in tough times - has sought to increase the takings from indirect taxes and broaden the tax base for corporate income taxes.

In Latin America, the average corporate tax rate this year is unchanged at 26.9 per cent - the first time there has been no cut in rates since 2004. In Europe, average rates stay at 23.2 per cent - the first time in 13 years that they have failed to fall year on year.

The survey showed many governments have acted to widen and strengthen their tax bases, with measures including: restricting the circumstances under which companies can use losses to reduce taxable profits; taking a more aggressive approach to enforcing transfer-pricing rules; and reducing the tax deductibility of interest payments.

Owi Kek Hean, head of KPMG Tax Services in Singapore, says: 'It is likely that headline corporate tax rates will resume their fall in time, but companies are likely to find themselves paying for the reduced rate in other ways. Overall effective tax rates for global companies may well rise, due to the broadening of the tax base.'

Loughlin Hickey, global head of tax at KPMG, adds: 'As governments re-shape their tax policies, it is important that corporations engage in the debate. Policymakers need encouragement to look beyond their current fiscal needs to the long-term global value to be derived from globalisation and sympathetic tax regimes.'

The KPMG report also notes that while headline corporate tax rates have been declining globally, average indirect tax rates have remained stable - indicating a long-term shift towards increased reliance by many governments on indirect taxation.

The change has come about in three ways: 1) average indirect tax rates remaining stable; 2) new indirect tax regimes being introduced as jurisdictions modernise their tax systems; and 3) significant reform of existing indirect regimes with a view to protecting and broadening the base to which the tax is applied.

Mr Owi says: 'All this is clear evidence of a major long-term change in the way that many governments are funded. For companies, it means that the management of indirect taxes will become much more important.'

The US remains the only OECD country without a national indirect tax system.

KPMG's report also notes that there has been a significant increase in international cooperation among tax authorities, resulting in greater pressure on jurisdictions with low tax rates, a limited exchange of information, and a lack of transparency in their tax systems.

But KPMG says it remains to be seen whether such cooperation by participating countries is converted into pressure on countries with the lowest rates to move closer to the average.

In Singapore, the government recently passed an Income Tax Bill allowing it to implement an internationally agreed standard for the exchange of information on tax matters.

Mr Owi says: 'We may also be seeing the beginning of renewed discussion on worldwide rather than territorial taxation. If that occurs, then the financial crisis will truly have triggered a revolution in the way companies are taxed as well as altering the dynamics of tax competition.'