Recession Hastening Move to Indirect Taxes as Governments Seek More Revenue
Canada bucks the trend with higher corporate income tax, lower indirect tax rates
TORONTO - An urgent need for more revenue is pushing many governments around the world to increase indirect taxes and broaden the tax base for corporate income taxes, KPMG International's latest annual survey of business tax rates has found.
The survey indicates that Canada's general corporate income tax rate of 33 percent for 2009, which includes federal and provincial tax, compares favourably with the US corporate rate of 40 percent, but is still higher than the OECD and European Union averages.
"Canada's corporate tax rate is the fifth highest among the 30 OECD countries in the survey," said Firoz Talakshi, Leader of KPMG in Canada's International Tax practice. "But Canada's general corporate tax rate will continue to fall until 2012, when the federal tax rate will be 15 percent, versus 19 percent in 2009."
Looking at indirect taxes, the survey indicates that Canada's HST and combined GST and provincial sales tax rates are generally lower than many other countries' value-added tax (VAT) and GST rates. HST and combined GST-PST rates are around 13 percent, depending on the province (from a low of 5 percent GST only in Alberta, to a high of just over 15 percent GST-PST in PEI).
In contrast, the average VAT rate in Europe is 19.8 percent for 2009 (up from 19.5 percent in 2008) and the average VAT/GST rate for OECD countries is 17.6 percent for 2009.
Although the upcoming harmonization of BC and Ontario's PST with the GST will not effectively change the tax rate in those provinces, harmonization generally broadens the tax base that rate applies to, making more things taxable. As of July 1, 2010, when the harmonization takes effect, only three provinces will still have PST.
"Indirect taxes are generally very stable." said John Bain, Associate Partner at KPMG in Canada's Toronto office. "Up until this year, taxes on corporate profits have tended to decline each year while indirect taxes have stayed roughly the same. So for the past 5 or 6 years, revenues from indirect taxes have quietly been contributing a larger and larger part of many government incomes.
But now we are seeing more active moves in this direction. The number of countries with indirect tax systems is now over 150 and rising annually. Those governments that already have these systems are widening the range of services that attract VAT. Rates in Asia-Pacific are expected to rise as their systems develop and mature, and increases already planned are likely to take the average in the European Union up to 20 percent next year.
All this is clear evidence of a major long-term change in the way many governments are funded. For companies, it means that the management of indirect taxes will become much more important," says Bain.
Turning to taxes on profits, many countries have used them as a competitive tool to attract corporate investment. But the urgent need for tax revenues to plug holes in public budgets around the world, as a result of the global recession, seems to have forced a subtle change in this policy.
Many governments are acting to widen and strengthen their tax bases by implementing 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
- Reducing the tax deductibility of interest payments.
At the same time, international cooperation among tax authorities has significantly increased, especially on action against tax havens and exchange of information. It remains to be seen whether that cooperation is converted into pressure on those countries with the lowest rates to move closer to the average.
"It is likely that general corporate tax rates will resume their fall in time, but companies are likely to find themselves paying for the reduced rate in other ways," said Talakshi. "Overall, effective tax rates for global companies may well rise, due to the broadening of the tax base."