Global tax war promises pain for consumers
Competition between 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.
By Agencies |
HONG KONG: Competition between 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 globalisation makes it easier to shift jobs and capital across borders, developed economies are having to slash tax rates to remain competitive with financial centres like 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 PricewaterhouseCoopers in London. “Countries are saying: if we get a business to locate here, then that business will generate a lot of tax through VAT, employment and other taxes.”
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 percentage points from 33% if elected. However, pressure on public finances means cuts in direct taxes are being accompanied by rises in value-added tax (VAT) and other indirect taxes, particularly in developed countries that have ageing populations and face demands for better services.
Corporate tax has dropped by an average 20 percentage 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.
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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 United States, 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 United States is the only major industrialised 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 healthcare? 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 like Hong Kong, where companies pay just 17.5% tax on profits.
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