What’s the OECD’s Most Competitive Tax Code for 2019?
As we all know by now, Tax Foundation’s ITCI takes an in-depth look at two main aspects of a country’s tax code—competitiveness and neutrality.
As explained by Tax Foundation’s Daniel Bunn and Elke Asen: “A competitive tax code is one that keeps marginal tax rates low. In today’s globalized world, capital is highly mobile. Businesses can choose to invest in any number of countries throughout the world to find the highest rate of return. This means that businesses will look for countries with lower tax rates on investment to maximize their after-tax rate of return. If a country’s tax rate is too high, it will drive investment elsewhere, leading to slower economic growth. In addition, high marginal tax rates can lead to tax avoidance.”
Furthermore, Bunn and Asen write, “A neutral tax code is simply one that seeks to raise the most revenue with the fewest economic distortions. This means that it doesn’t favor consumption over saving, as happens with investment taxes and wealth taxes. This also means few or no targeted tax breaks for specific activities carried out by businesses or individuals.”
Overall, Tax Foundation concludes, “A tax code that is competitive and neutral promotes sustainable economic growth and investment while raising sufficient revenue for government priorities.”
Estonia (Again!) Leads the Way in Tax Competitiveness
It’s now six years in a row that Estonia leads the way with the group’s most competitive tax system.
As explained by the ICTI, Estonia benefits from four key policies: 1) “a 20 percent tax rate on corporate income that is only applied to distributed profits;” 2) “a flat 20 percent tax on individual income that does not apply to personal dividend income;” 3) “its property tax applies only to the value of land, rather than to the value of real property or capital,” and; 4) “a territorial tax system that exempts 100 percent of foreign profits earned by domestic corporations from domestic taxation, with few restrictions.”
France Remains Stuck in Last Place
Just like Estonia but in the opposite direction, France maintains its position for the sixth straight year as the country with the least competitive tax system among OECD members.
As reported by Bunn and Asen, France “has one of the highest corporate income tax rates in the OECD (34.4 percent), high property taxes, a net tax on real estate wealth, a financial transaction tax, and an estate tax,” as well as “high, progressive, individual income taxes that apply to both dividend and capital gains income.”
2019’s Tax Competitiveness’ Movers and Shakers
Belgium and Canada experienced the greatest moves this year, albeit in different directions.
Belgium dropped from slot 22 to 27 following its adoption of several regulations imposed by various EU directives, including both Controlled Foreign Corporation (CFC) and thin capitalization rules.
Canada, on the other hand, gained five spots, settling in at number 15 in 2019 thanks to changes to its corporate income tax base that now “[provides] expanding write-offs for capital investments in machinery and buildings” and “full expensing for short-lived assets.”
Also worth noting, Turkey moved up to number 13 following great improvements in compliance times.
According to Dunn and Alse, Turkey’s “average corporate tax compliance time fell to 24 hours from 44.5 in 2018; individual income tax compliance time fell to 71 hours from 91 hours in 2018; and consumption tax compliance time fell to 75 hours from 80 hours.”
Where does your jurisdiction rank and where do you expect it to slot in in 2020?