Corporate income tax rates on the increase globally

A recent report on the latest trends in global tax reform indicates that the decline in statutory corporate income tax rates over the past two decades halted in 2023.

The Tax Policy Reforms 2024 report, published by the Organisation for Economic Cooperation and Development (OECD), shows that far more jurisdictions implemented corporate income tax rate increases than decreases in 2023. 

The increases aim to address rising fiscal deficits. This reversal is the first since the report’s first edition in 2015. 

The OECD’s corporate tax database covering 141 jurisdictions shows that the average combined tax rate levied on company profits increased from 20% to more than 21% last year. Two decades ago, the average rate was 28.2%.

In South Africa, the corporate income tax rate was reduced from 30% in 2000 to 29% in 2006, 28% in 2009, and 27% last year, but it remains substantially higher than international norms.

The increase in revenues from company taxes in over three quarters of the OECD countries was driven by heightened profits, particularly in the energy and agriculture sectors.

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Shifting the burden from individuals

Several countries made “comprehensive progressive” reforms to shift the tax burden away from low- and middle-income households. Mauritius overhauled its personal income tax (PIT) system, abolishing its solidarity levy and replacing the existing three tax brackets with 11 tax brackets and marginal rates ranging from 0% to 20%.

Croatia has been particularly innovative. It abolished its PIT rates of 20% and 30% and replaced them with new tax rates. The rates are determined by local governments within prescribed ranges. A small town with less than 30 000 people can choose a rate between 15% to 22.4% or 25% to 33.6%. For bigger towns the range is either 15% to 23% or 25% to 34.5%. 

South Africa has seven tax brackets, with a top marginal rate of 45% introduced in 2017/2018. Individuals carry by far the biggest burden, with PIT accounting for R649.7 billion of total tax collections compared to R301 billion from corporate income tax and R445 billion from value-added tax (Vat) in the 2023/24 tax year. 

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Vat trends

Vat revenues as a share of gross domestic profit (GDP) fell in 16 of the 36 OECD countries. The tax-to-GDP ratio for Africa, covering 33 countries, remained constant at 15.6% of GDP from 2020 to 2021. Latin America and the Caribbean region, with 26 countries covered, saw an increase of 0.8 percentage points to 21.7%, and the Asia-Pacific region, comprising 29 economies, experienced a modest rise of 0.2 percentage points to 19.8%.

Several countries have already taken the lead in offering temporary Vat rate reductions to cushion the price increases on some basic food items.

According to the report, a 0% Vat rate was applied on selected basic food items in Bulgaria (July 2022 to June 2024), Peru (May 2022 to July 2023), Poland (1 February 2022 to 31 March 2024), and Spain (January 2023 to July 2024).

Spain also reduced its Vat rate from 10% to 5% for cooking oil and pasta.

Some jurisdictions made Vat rate reductions permanent or introduced open-ended measures.

“Belgium, which had introduced a temporary reduction of the Vat rate (from 21% to 6%) on electricity and natural gas in April 2022 decided to make this reduction permanent. The rate remained at 6% from April last year,” the report stated.

Vat accounted for 20.2% of total tax revenues across OECD countries in 2020. This yielded nearly three times more revenue than excise duties.

Excise duties, which mainly target specific goods and services, contributed to 6.9% of total tax revenues in the same year.

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The sin taxes

Four countries (Iceland, the Netherlands, the UK and Canada) have decreased the excise tax burden on alcoholic beverages to support businesses.

“Iceland significantly reduced its excise rate by 50% for beer produced by small, independent breweries to foster employment and innovation, particularly in rural areas. The Netherlands halved its proposed increase in alcohol duties, meaning the tax is still increased but by significantly less than foreseen.”

In the UK, tax is based on the strength of the alcohol rather than on the volume. The country also announced six-month alcohol duty freezes for 2023 and 2024.

In Canada, excise taxes on the first 15 000 hectolitres of beer brewed in the country were reduced by 50%, and the government temporarily capped the annual inflation adjustment for excise duties on alcoholic products at 2%.

In South Africa excise duties on alcohol and tobacco have been increased by more than inflation for several years.

In the 2024 February budget, excise duties on alcoholic beverages increased by 6.7% and 7.2%. 

The excise tax burden as a percentage of the retail price of a popular brand of cigarettes equates to 40%. In this year’s budget, the tobacco excise duties increased by 4.7% for cigarettes and 8.2% for pipe tobacco and cigars. This will amount to an additional income of R800 million for the fiscus.

South Africa lost billions in excise duties during the Covid-19 pandemic due to the ban on the sale of alcohol and cigarettes, boosting particularly the illicit tobacco market and hurting the economy. 

This article was republished from Moneyweb. Read the original here.