Low corporate tax rates can give a country a competitive advantage over economic rivals and are linked to higher than average economic growth, claims a KPMG study of 86 countries published on Wednesday.
Basing its evidence on the economic growth enjoyed by countries such as Ireland, Norway, Sweden and Denmark, KPMG, the professional services firm, drew a parallel between high growth rates and lower corporate tax rates.
However, KPMG cautioned that the apparent advantage of a lower corporate tax rate tended to be short-term and had to be backed up by a good legal and economic infrastructure in order to attract long-term private sector investment.
The survey cited Ireland as the outstanding example. It has cut its rate of corporate tax to 12.5 per cent - the lowest rate of any economically developed country - from 40 per cent in 1993. Economic growth in Ireland has been an annual 12 per cent at its peak but has slowed to around 2.5 per cent, which KPMG attributed to “strong competition on tax rates and incentives for inward investment from Eastern European countries like Poland and Hungary.”
The Scandinavian countries have also experienced high economic growth rates while cutting corporate tax. KPMG noted that the main exception to this trend is the US, which has maintained high economic growth and a corporate tax rate of 40 per cent.
Loughlin Hickey, head of KPMG’s global tax practice, said: “Despite its high taxes, the sheer economic power of the US market has preserved its attraction for multinational companies.”
KPMG noted a trend of intensifying international tax competition over the past 14 years. The average corporate tax rate of countries it had surveyed over that period has dropped from an average of 38 per cent to 27.1 per cent.
“Once a major industrialized economy cuts its rates, others seem compelled to do the same, in a process of international tax competition that continues and intensifies over time,” said Mr Hickey.
The survey is available on: http://www.kpmg.com/Services/Tax/IntCorp/CTR/
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