Corporate tax burden shifting to indirect taxes

Corporate tax rates have declined in every region of the world, even in North America, where they are still higher than everywhere else, averaging 33% in 2012, about five percentage points lower than in 2006, KPMG research shows.

But as countries lowered corporate taxes to attract investment, they also increased indirect taxes, such as goods and services taxes (GST) and excise taxes, and stepped up enforcement with more aggressive tax audits and investigations.

The shift from corporate taxes to indirect taxes has brought about value-added taxes in so many countries that VAT has become the third most important income source for governments behind social security contributions and personal income taxes, a KPMG study on corporate and indirect taxes suggests. KPMG projected VAT rates will continue to increase and more countries will adopt them.

China, for example, expanded a pilot VAT programme that took effect January 1st 2012 in Shanghai, to 10 other cities within a year. Additional cities are scheduled to be added this year, according to KPMG’s most recent Global Indirect Tax Brief.

Other indirect taxes are also becoming more popular. For example, financial transaction taxes are going up in countries that already levy them and are being considered in countries that haven’t, especially in Europe, according to the study. And governments are trying out new types of excise taxes, such as the 2.3% excise tax on the sale of medical devices that took effect January 1st 2013 as part of the US Health Care and Education Reconciliation Act of 2010.

KPMG calculated that indirect taxes average 15.5% globally, up 0.17% since January 2012.

Indirect taxes are highest in Hungary (27%), Iceland (25.5%), and Sweden, Denmark, Norway and Croatia (25%). Several countries, including Bahrain, Hong Kong and Saudi Arabia, levy no indirect taxes.

The shift from corporate to indirect taxes is accompanied by six trends in the global tax environment, according to KPMG:

• Governments are broadening the tax base by limiting deductions and loss carryforwards.
• Regulators are increasing scrutiny in such areas as transfer pricing.
• Countries are collaborating more to identify and pursue tax evaders.
• Discomfort in the general public is growing about companies whose tax strategies are perceived as unfair.
• The number of anti-abuse regulations is rising.
• Penalties are increasingly used to boost government revenue.

“In this environment, international businesses need to have appropriate strategies in place, including the right mix of income tax and VAT/GST management resources, to stay ahead of these trends,” Wilbert Kannenkens, KPMG’s head of global international corporate tax, and Tim Gillis, KPMG’s head of global indirect tax services, write in the study’s introduction.

What’s a company to do to get prepared? KPMG has a few suggestions:

• Invest in tax department transformation projects to meet the challenges ahead. Such projects include standardising and automating tax processes, centralising the management of tax departments and outsourcing income and/or indirect tax activities.
• Add expertise to better manage the effective tax rate and financial risks.
• In the case of disputes, tax directors should take a direct role in reviewing dispute responses before they are submitted.

Related CGMA Magazine content:

“Global Consultants Identify Top Tax Challenges for Multinationals and Offer Advice”: More scrutiny during audits, transfer-pricing issues and rapid changes in international tax legislation top the list of global tax challenges in a survey of multinational companies. A global consortium of consultants takes a look at the tax issues and offers advice.

“The Countries With the Most Business-Friendly Taxes”: In the past eight years, paying taxes has become easier and the tax burden lighter for many small and mid-size companies around the world, according to research by the World Bank and PwC. Find out which countries have the lowest tax rates and the least compliance hassles.

“M&A Tax Efficiencies Increasingly Scrutinised by Authorities”: As global companies increase their focus on tax efficiencies in mergers and acquisitions, tax authorities are stepping up their scrutiny. In this risky landscape, companies need a coordinated strategy with respect to tax audits and disputes.

—Sabine Vollmer (svollmer@aicpa.org) is a CGMA Magazine senior editor.