Global tax race for foreign investment

Countries with low tax rates have a healthy flow of foreign investments

Foreign investment benefits the host countries, bringing in technical know-how, enhancing work force skills, increasing productivity, generating business for local firms, and creating better-paying jobs. Lowering the corporate tax rate sends a powerful message to corporates and global investors. The total tax rate is one measure of how competitive a country is, with lower figures being better.

Worldwide jurisdictions desire to possess a competitive, ‘low-rate, broad-base’ business tax environment. Countries with low tax rates have been able to maintain a healthy flow of foreign investment.

Switzerland maintains a below average corporate tax rate of 17.92 per cent, which is appealing to many foreign investors. Sweden has some of the most liberal foreign investment laws in the world and a relatively low corporate tax rate of 22 per cent. Ireland is well-known for its low corporate tax rate of 12.5 percent, which has enticed investment from pharmaceutical and technology firms for decades. Hong Kong with a corporate tax rate of 22.8 percent has been one of the most attractive places in the world for businesses. Many companies from around the world choose Singapore as a base for their Asian operations, owing to its low tax rate of 18.4 percent.

Multi-year strategy

In recent years, nations around the world have dramatically cut income tax rates to become more competitive. Hungary’s rate change for 2017 from 19 per cent to 9 per cent is significant in itself, given that, for many years, we have seen single percentage point cuts in most countries. In France, the effective corporate tax rate for large companies fell from 38 percent to 34.43 per cent in 2017. A 28.92 percent top corporate tax rate will apply to every company for fiscal years January 1, 2020 onwards. Japan, has seen its effective corporate tax rate fall from 38.01 per cent in 2013 to an effective 29.97 percent in 2017.

In the UK, the corporate tax rate will fall to 17 per cent in 2020, a sizeable decrease of 11 percentage points in 10 years.

India had also announced a multiyear strategy, with the corporate tax rate being reduced from 30 per cent to 25 per cent over the next three years. This was to be accompanied by a gradual phasing out of incentives.

The US had the fourth highest statutory corporate income tax rate in the world, levying a 38.91 per cent tax on corporate earnings. Its new rate, down to 21 per cent, takes the US from the top of the global tax spectrum to the lower end. China, charges a corporate tax at the rate of 25 percent, on top of which the companies are required to make social security contributions, pushing their tax burden much higher. Pursuant to US tax reforms, even China is expected to streamline the taxes imposed on foreign businesses.

Race for the lowest rate

Owing to the budget expectations of a corporate tax rate cut in India soaring high, there may be a rate cut. But whatever new, lower tax rate is determined, there will probably be another country willing to lower its rate further, creating a race to reach the lowest first. But is corporate tax rate the only major factor driving foreign investments?

Investor surveys show that political stability and security, along with a stable legal and regulatory environment, are the leading characteristics considered by executives in multinational corporations before they commit capital to a new venture.

These considerations far outweigh such issues as low tax rates and labour costs. With the implementation of OECD’s BEPS project, we can expect the countries to abstain from getting into ‘harmful tax competition’ and work around an ‘acceptable’ form of tax competition and save their share of tax revenues.

But all said and done, issues of international tax competition are not going away anytime soon. In the face of possible tectonic shifts in tax systems, it has become even more important to understand the cross-border impact of national tax policies and how governments react to them.

The writer is Managing Partner, Nangia & Co LLP

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