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Consumers may be losers in a competitive global tax regime

Consumers may be losers in a competitive global tax regime
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First Published: Thu, Apr 26 2007. 03 53 AM IST

Stress building: Taxpayers filing their annual returns. Higher indirect taxes are expected to continue, while corporate taxes are falling
Stress building: Taxpayers filing their annual returns. Higher indirect taxes are expected to continue, while corporate taxes are falling
Updated: Thu, Apr 26 2007. 03 53 AM IST
Hong Kong: Competition among tax regimes around the world is intensifying as governments seek to retain industries and attract foreign investment, and consumers may be the losers if indirect taxes go up to balance the books.
As globalization makes it easier to shift jobs and capital across borders, developed economies are having to slash tax rates to remain competitive with financial centres such as Hong Kong and Singapore and emerging economies in Eastern Europe, where Estonia has done away with corporate tax altogether.
“Corporate tax is part of a country’s shop window,” said John Whiting, a tax partner at accountants PicewaterhouseCoopers in London. “Countries are saying: If we get a business to locate here, then that business will generate a lot of tax through value-added tax (Vat), employment and other taxes.”
Stress building: Taxpayers filing their annual returns. Higher indirect taxes are expected to continue, while corporate taxes are falling
Britain and Germany will cut corporate taxes in 2008, while French presidential candidate Nicolas Sarkozy has pledged to slash corporate tax by at least 5% from 33% if elected.
However, pressure on public finances means cuts in direct taxes are being accompanied by rises in Vat and other indirect taxes, particularly in developed countries that have ageing population and face demands for better services.
Corporate tax has dropped by an average 20% points in developed economies in the past two decades while income tax has fallen 25 points, according to the Cato Institute, a Washington think tank.
Analysts expect the trend towards higher indirect taxes to continue.
The political ramifications of asking a broader cross-section of the public to shoulder the burden through sales and other indirect taxes is creating conflict between high- and low-tax countries.
In the US, two Bills proposed by Democratic senators Byron Dorgan and Carl Levin put low-tax jurisdictions, including Hong Kong and Singapore, on a blacklist and US firms and expatriates based there would be forced to pay more US tax.
The US is the only major industrialized nation that taxes its citizens and companies on their worldwide income. American companies overseas can defer, often indefinitely, paying US tax, but the Dorgan and Levin Bills would end that practice in selected low-tax jurisdictions.
This is seen as an easier target than raising the tax paid by workers and companies at home.
“Where do you go if you want to raise money for health care? You don’t want to raise gas or income tax,” said Andrew Quinlan, president of the Center for Freedom and Prosperity Foundation in Virginia, who opposes the Bills.
One of the Bills, proposed by Levin, is backed by Democratic presidential candidate Barack Obama and analysts say both Bills stand a better chance of being passed since the Democrats took control of Congress last year.
The legislation also aims to stem the flow of jobs and capital by making it more expensive to operate in low-tax centres, analysts say. But opponents say it would make American companies less competitive in places such as Hong Kong, where companies pay just 17.5 % tax on profits.
“The US is shooting itself in the foot,” said Dan Mitchell, a fellow of the Cato Institute. “If you are a US company, you’re probably paying 35% federal tax and 5% state tax. So in Hong Kong you’d have a tax burden that is at least twice as high as your competitors’.”
Germany, which has seen Volkswagen and other companies shift production and jobs to neighbours such as Slovakia, has accused East European countries of tax dumping. Low-tax European Union states including Ireland, Estonia and Slovakia are fighting a proposal to harmonize how EU members calculate corporate tax, seeing it as a step towards uniform tax rates at higher levels.
Ireland has become a magnet for foreign investment with its 12.5% corporate tax. Deputy prime minister Michael McDowell said last week that it needed to keep that rate to remain competitive with other low-tax regimes and emerging powerhouses like China and India. As low-tax regimes keep up the pressure to cut direct taxes, consumers face further rises in sales taxes.
Germany raised Vat by 3% to 19% this year. Singaporeans face a two-point increase in their goods and services tax to 7% from July—in part to help offset a two-point cut in corporate tax next year to 18 %, but also to provide some assistance to poorer citizens.
“The coverage of a sales tax is much broader than income tax. It includes pensioners and other non-wage earners,” said Yvonne Law, a tax partner at accountants Deloitte Touche Tohmatsu in Hong Kong. “These people will want something in return, such as better health and welfare spending.”
If there’s no obvious benefit, taxpayers may revolt. Reuters
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First Published: Thu, Apr 26 2007. 03 53 AM IST
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