Index Scores Most Tax-Competitive Jurisdictions

Tom Burroughes

25 October 2021

Estonia, Latvia, New Zealand, Switzerland and Luxembourg are first, second, third, fourth and fifth respectively this year in an international ranking of tax competitiveness, with some countries improving their standing on corporate tax.

The US and UK both slipped from their previous rankings as a result of tax changes, the International Tax Competiveness Index 2021, which covers OECD countries and jurisdictions, said. The study, which comes from the Tax Foundation, as far as this publication could see, did not refer to Hong Kong and Singapore. The study referred to cuts in effective corporate tax rates in the US and UK as being important. It is worth noting that over the past year the UK has hiked the rate and the Joe Biden administration is pushing to do so also.

The index is a “relative comparison of OECD countries’ tax systems with respect to competitiveness and neutrality.” In the report, authors of the index said “neutrality” refers to a tax code that seeks to raise the most revenue with the fewest economic distortions. Such figures shed light on where jurisdictions – often important wealth hubs – stand. Somewhat strikingly, the US is 21st, ahead of the UK at 22nd place. Ireland – renowned for its low corporate tax rate of 12.5 per cent – stands at 19th. France is 35th and Italy a lowly 37th.

“A competitive tax code is one that keeps marginal tax rates low. In today’s globalised 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 maximise 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 impede domestic investment and lead to tax avoidance,” the report said. “According to research from the OECD, corporate taxes are most harmful for economic growth, with personal income taxes and consumption taxes being less harmful. Taxes on immovable property have the smallest impact on growth.”

Ironically, the report came out in a year when President Biden had pushed for major countries in the Group of 20 to adopt a minimum corporate tax rate of 15 per cent to prevent some jurisdictions undercutting others by a wide margin. Some have called this move a sort of “tax cartel”.

Countries
Delving into details, the report noted that New Zealand has a “relatively flat, low-rate individual income tax that also largely exempts capital gains” , a “well-structured property tax, and a broad-based value-added tax.”

In the case of Switzerland, the Alpine state has a “relatively low” corporate tax rate , a low, broad-based consumption tax, and an individual income tax that partially exempts capital gains from taxation. Switzerland cut its top combined corporate income tax rate from 21.1 per cent in 2020 to 19.7 per cent in 2021. Luxembourg has a broad-based consumption tax and a competitive international tax system.

One of the highest-ranking nations, the Czech Republic, stood at seventh in the rankings. “The Czech Republic introduced a permanent two-year carry-back provision for net operating losses, allowing businesses to be taxed on their average profitability,” it said.

The biggest riser in the 2021 rankings was Israel, surging from 27th spot in 2019 to 14th this year. The country has simplified its tax code and cut labour taxes and other levies. The time to file consumption taxes has also fallen.