Monday, October 29, 2018
Estonia has topped the Tax Foundation's International Tax Competitiveness Index for the fifth successive year, being deemed to have the "best tax code in the OECD."
The 2018 ITCI, published on October 23, 2018, seeks to measure the relative competitiveness and neutrality of each tax regime in the OECD grouping. It finds that the most competitive tax systems are the ones with the lowest marginal tax rates and the least amount of distortionary taxes.
"In today's globalized world, capital is highly mobile," the Tax Foundation said. "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."
Citing research from the OECD, the Foundation said that corporate taxes are the most harmful for economic growth, with personal and consumption taxes being less detrimental, and immovable property taxes having the least impact on an economy.
The Foundation therefore attributes Estonia's top score in the 2018 index to four key factors: a 20 percent corporate tax that only applies to distributed profits; a flat 20 percent tax on individual income that does not apply to personal dividend income; a property tax that applies only to the value of land, rather than to the value of real property or capital; and a territorial tax system that exempts 100 percent of foreign profits earned by domestic corporations from domestic taxation, with few restrictions.
Rounding out the top-ten in the 2018 ITCI are (in descending order): Latvia (2nd), New Zealand, Luxembourg, the Netherlands, Switzerland, Sweden, Australia, the Czech Republic, and Austria (10th).
France, which has a headline corporate tax of 33.33 percent, lies at the foot of the index, with the Tax Foundation observing that the country has not kept up with global trends towards lower and simpler taxes.
"Over the last few decades, France has introduced a number of reforms that have significantly increased marginal tax rates on work, saving, and investment. For example, France recently instituted a corporate income surtax, which joined other distortive taxes such as the financial transactions tax, a net wealth tax, and an inheritance tax," the Foundation noted.
While France plans to gradually lower its corporate tax to 25 percent over the next few years, the Foundation argued that "many more changes are necessary for France to have a competitive tax code."
Following the passage of the 2017 Tax Cuts and Jobs Act, which reduced the US headline federal corporate tax rate from 35 to 21 percent and improved capital investment expensing rules, the United States has improved its ranking from 28th place to 24th.
Belgium was another significant mover in the 2018 index after adopting a tax reform package that included a reduction in the statutory corporate tax and an increase the participation exemption from 95 to 100 percent. As a result, Belgium is ranked 19th in the 2018 ITCI, up from 25th in 2017.