Positive infrastructure

Positive infrastructure

New research covering 86 countries has confirmed that low corporate tax rates can help to give a country a significant competitive advantage over economic rivals, and are connected with higher than average economic growth. However, it has to be backed up with a good legal and economic infrastructure and targeted incentives if countries are to attract long term private sector investment. So concludes a study by KPMG International, which analyses international movements in corporate tax rates for the past 14 years, drawing on the annual surveys the organisation has conducted since 1993.
The findings point to the economic growth enjoyed over this period by countries like Ireland, Norway, Sweden, and Denmark, and draws a parallel between this success and a favourable corporate tax regime. In particular, Ireland has consistently pursued policies designed to attract new investment over the past 15 years. Its headline corporate tax rate has fallen in stages from 40% in 1993 to 12.5% today, giving it the lowest corporate tax rate of any developed country. At its peak, the Irish economy enjoyed annual growth rates of up to 12%, although this has recently slowed to around 2.5% due to strong competition on tax rates and incentives for inward investment from eastern European countries such as Poland and Hungary. The main exception to this trend is the US, which has maintained high levels of growth with a consistently high corporate tax rate of 40%. 'Despite its high taxes, the sheer economic power of the US market has preserved its attraction for multinational companies', says KPMG's Loughlin Hickey.
A single reduction in taxes alone is not enough to ensure economic success; inward investment can be also be encouraged by marketing the benefits of placing operations in a particular country. Strategies being pursued include market share strategies, e.g. enforcement of transfer pricing rules, and diversification of income, i.e. a shift in the balance between direct and indirect taxes.
Governments should also explain to investors 'the benefits arising from their social policies'. This can make it easier for corporations to persuade shareholders and others that 'a particular siting decision was financially sensible, socially responsible and capable of producing the sustainable benefits that investors are looking for', says Mr Loughlin.
A full copy of the study can be downloaded from www.kpmg.com.

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