Compared to other regions in the world, Europe has made it very convenient for companies to file taxes. But nine years into tax reforms, tax rates in the EU and the European Free Trade Association (EFTA) countries are no longer falling, and in some countries public scrutiny is increasingly trained on the fairness of corporate tax laws, research by Deloitte, PwC and the World Bank suggests.
Tax compliance has become fairly hassle-free in the 34 countries of the EU and EFTA, a 2014 PwC and World Bank study found. In 2012, it took an average of 179 hours for companies to comply with tax laws in the EU/EFTA region, down from about 250 hours in 2004 and the second shortest time worldwide behind the Middle East (159 hours). The average number of tax payments declined every year since 2004 to 13.1 payments in 2012, second lowest behind North America (8.3).
Tax rates declined in the EU/EFTA from 2004 to 2010. In 2011, tax rates continued to decline in many other regions of the world, but they increased slightly in the EU/EFTA and didn’t budge the following year.
In 2012, the 41.1% average tax rate in the EU/EFTA region was ranked fourth lowest among eight regions studied by PwC and the World Bank.
What happened to cause the shift in trends? The financial crisis in the euro zone lowered the tax certainty in some of the region’s most important economies, particularly in Italy, Spain and France, a 2013 Deloitte survey of about 1,000 heads of tax suggests.
“Governments and tax authorities traditionally seek to increase tax receipts in times of austerity,” according to the Deloitte report. Simultaneously, reports about multinational companies reducing their tax rates in European tax havens stoked public scrutiny and calls for new regulation.
Responses by the European heads of tax in the Deloitte report reflected the changes the euro-zone crisis brought about and the challenges they created for businesses in Europe:
Most favoured economies. The Netherlands, the UK, Luxembourg and Switzerland were among the European economies most favoured by companies. Fifty-eight per cent of the respondents from the UK and 47% of respondents from the Netherlands picked their own country as the easiest to operate in.
Factors driving favourable ratings were helpful tax officials, a professional tax system that works in a timely manner and tax authorities that were viewed as pragmatic, clear and open.
Most challenging economies. Russia, Italy, Ukraine, Poland, Greece and Portugal were considered among the most challenging economies. The two factors considered most responsible for making an economy challenging were frequent changes in tax legislation and ambiguous, weak or contradictory guidance from tax authorities.
Key job stressors. Heads of tax must match technical expertise with a deep understanding of the business, integrate both and keep abreast of any changes. Filing tax returns and timely tax compliance are important responsibilities of the job, but respondents rated them as the least stressful.
The top stressor was the effort and time needed to keep up with rapidly changing tax regulation (52.6%). Increased scrutiny by tax authorities was second at 39.3%.
Three-fourth of the respondents said they have been subject to a tax audit in the past three years.
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 topped the list of global tax challenges in a 2012 survey of multinational companies. A global consortium of consultants takes a look at the tax issues and offers advice.
“Italy’s Parliament Passes ‘Google Tax’ on Digital Advertisements”: Italy’s Senate, the Senato della Repubblica, passed a law under which Italian companies are required to purchase online advertising from Italian companies, rather than from companies based in foreign countries.
“The Countries With the Most Business-Friendly Taxes”: In the previous eight years, paying taxes became 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 released last year. Find out which countries had the lowest tax rates and the least compliance hassles.
—Sabine Vollmer (email@example.com) is a CGMA Magazine senior editor.
European countries with the most business-friendly tax laws
Tax laws for businesses differ considerably from country to country in Europe. The European countries with the most business-friendly tax laws also rank highly in comparison with 189 countries worldwide. The European top ten, based on their worldwide rankings are:
- Ireland, 6th
- Denmark, 12th
- UK, 14th
- Luxembourg, 15th
- Switzerland, 16th
- Norway, 17th
- Finland, 21st
- Malta, 27th
- Netherlands, 28th
- Estonia, 32nd
Source: PwC, The World Bank, and International Finance Corporation.