In what has become an annual tradition, Tax Foundation, an independent US-based organization focused on tax policy research and public outreach, released its 2015 International Tax Competitiveness Index (ITCI), which rates the business competitiveness of each tax system in the OECD.
As part of this process, Tax Foundation looks at several variables in order to gauge the competitiveness of each specific tax system. Among the criteria studied are corporate, consumption, property, payroll and individual taxes, as well as international taxation rules for each country.
Estonia Has the #1 OECD Tax System!
Estonia, as was the case in 2014, topped the rankings followed by New Zealand, Switzerland, Sweden and the Netherlands.
Per an analysis by Tax Foundation economist Kyle Pomerleau, Estonia surged to the top in part thanks to its “flat individual income tax rate of 20 percent, a broad-based 20 percent value-added tax, and few distortive taxes such as the estate tax or financial transaction taxes.”
Above all, however, Estonia’s innovative 20 percent cash-flow tax for corporate income pushes its tax system to number one. Pomerleau says this unique taxation regulation, “rather than requiring corporations to calculate their taxable income using complex rules and depreciation schedules every single year, … is only levied on a business when it pays its profits out to its shareholders.”
2015 International Tax Competitiveness Index Rankings
Source: Tax Foundation, 2015 International Tax Competitiveness Index
OECD’s Economic Superstars Fail to Shine
The tax systems for economic powerhouses such as the United States, the United Kingdom, Germany, Japan and France performed to mixed results. The UK and Germany placed 11th and 17th, while Japan, the US and France rounded out the rankings at spots 25, 32 and 34, respectively.
The US is an interesting case. According to Kyle Pomeraleau, the US scores poorly on three fronts. “First, it has the highest corporate income tax rate in the OECD at 39 percent (combined marginal federal and state rates). Second, it is one of the few countries in the OECD that does not have a territorial tax system, which would exempt foreign profits earned by domestic corporations from domestic taxation. Finally, the United States loses points for having a relatively high, progressive individual income tax (combined top rate of 48.6 percent) that taxes both dividends and capital gains, albeit at a reduced rate,” he says.
Italy Gets the Boot in Terms of Tax Competitiveness
Italy, with its wealth of economic hindrances, came in at number 33 and Alan Cole, another Tax Foundation economist, highlighted the Mediterranean nation’s problems. According to his analysis, Italy’s “narrow, poorly-defined tax base,” starting with its 22 percent value-added tax and corporate tax rate, is at the root of the poor ranking.
Cole says Italy’s “VAT, in practice, applies to relatively little of the economy. Some economic activity is taxed at the 22 percent rate, some is taxed at a reduced 10 percent rate, some is taxed at a further-reduced 4 percent rate, and some isn’t taxed at all,” making it very complicated for the country to fund much.
In terms of corporate tax, Cole asserts that, despite it standing at 27.5 percent, “it doesn’t raise as much revenue as it could; it has a lobbying system for research and development incentives, and a “patent box” with a lower rate in order to prevent more mobile kinds of corporate income from profit-shifting to other countries like Switzerland, Ireland, or Luxembourg. In practice, though, patent boxes can cost more revenue than they get back from international profit-shifting, and they always add complexity to the process of corporate tax filing.”
In this year’s rankings, Iceland and South Korea improved their rankings the most, while Slovenia, Mexico, Italy and the Czech Republic suffered the biggest drops.
What do you think of your jurisdiction’s tax system ranking? How do you think non-OECD nations like Russia, China, South Africa and India, to name a few, would fare if ranked by Tax Foundation?