Company tax rates
- Headline company tax rates do not necessarily provide an accurate indication of effective company tax rates. This is because the effective rate depends upon the tax base, which varies across jurisdictions. Typically, differences in tax bases occur in areas such as:
- depreciation rules,
- the taxation of foreign sourced income,
- the taxation of capital gains, and
- industry specific concessions.
- Small business tax relief and state or provincial company taxes can also alter effective company rates within jurisdictions.
- Of note is that New Zealand provides concessionary depreciation treatment (a 20% "depreciation loading") and does not have a comprehensive capital gains tax. These work to reduce our effective company rate.
The Tax Review emphasised that competing considerations complicate the choice of a company tax rate. The Tax Review concluded that to the extent company tax is attributable to New Zealand residents, there is a very strong case for aligning the company tax rate with the top marginal tax rate to remove the incentive for individuals to undertake complex tax planning and to substantially simplify the tax system and reduce compliance costs.
Reducing further the company tax rate without reducing the top marginal personal rate would increase the incentive for more individuals to undertake tax planning activity and could reduce the equity in the tax system. A reduction in the perceived fairness and integrity of the tax system would be likely to have negative consequences for the New Zealand system that is based upon voluntary compliance. The legislation required to attempt to reduce the scope for tax planning (for example, excess profit retention taxes) would also be likely to be complex in nature and could distort companies financing decisions. Therefore, the Tax Review recommended against reducing the company tax rate without reducing the top marginal income tax rate.
However, the Tax Review also stated that alignment would not necessarily be appropriate if it resulted in a company tax rate that was materially out of step with international norms, particularly if foreign investors were motivated by 'headline' rates of company tax.
- In terms of attracting inbound foreign investment into New Zealand, the Foreign Investor Tax Credit regime, combined with the ability of companies to manipulate debt/equity ratios to take advantage of lower tax rates that apply to debt investment, allows foreign investors to reduce their effective tax rate substantially below the statutory company rate (15.75% in some cases).
Company tax systems and personal tax rates
- A low effective company tax rate does not necessarily result in a low effective tax rate for individuals resident in that country. The effective tax rate on dividend income depends upon the interaction of the company tax regime with personal income tax rules.
Countries without full imputation systems, or countries with full imputation but personal income tax rates higher than company tax rates, may well have effective tax rates on dividend income that are higher than the effective company tax rate. In particular, classical company tax systems lead to double taxation as the after-tax company profits are taxed again as dividend income in the hands of shareholders at the shareholders' marginal personal tax rates without any credit provided for tax paid at the company level.
The following table broadly categorises the company tax regimes in OECD countries. The company tax rate is in brackets, source: KPMG survey.
|Full Imputation||Partial recognition of company tax||Classical|
|Australia (30)||Canada (38.6)||Austria (34)|
|Finland (28)||Denmark (30)||Belgium (40)|
|France (34)||Germany (38)||Hungary (18)|
|Mexico (35)||Iceland (18)||Ireland (16)|
|New Zealand (33)||Italy (40)||Japan (42)|
|Norway (28)||Korea (29.7)||Luxembourg (30)|
|Portugal (30)||Netherlands (34.5)|
|Spain (35)||Poland (28)|
|Turkey (33)||Sweden (28)|
|United Kingdom (30)||Switzerland (24.5)|
|United States (40)|
- Top marginal personal income tax rates for most OECD countries range approximately between 37% to 60%. Actual effective tax rates may be even higher because of additional social security charges and/or local body taxes.
- It is not possible, however, to determine a single effective tax rate on dividend income distributed to shareholders in many countries because there are often progressive income tax scales as well as different tax rules relating to different forms of the dividend distributions.
For example, distributions by UK companies of after-tax profits may effectively be exempt from any further tax if they are paid to specified entities that can distribute income tax-free to UK residents. Conversely, the lack of a full imputation regime in the UK means that after-tax company profits distributed directly to UK residents may be taxed at an effective rate that is higher than the top marginal income tax rate of 40%.
- Also relevant is that in some countries, particularly those with classical systems such as the US, companies may tend not to distribute profits. In these cases shareholders returns are largely based around increases in value of shareholdings, that may be taxed via capital gains taxes on realisation.
- Some countries with large disparities between the company tax rate and personal tax rates may also have excess retention taxes that seek to tax profits that are retained within companies in an effort to avoid the higher personal rates that would apply upon distribution. Alternatively, some forms of company income may be attributed directly to individuals and taxed at their marginal tax rate.
While it is likely that many countries with a lower headline company tax rate than New Zealand will have lower effective tax rates on income distributed to shareholders, this is not necessarily the case.
A more relevant comparison would be to compare effective tax rates across countries. However, effective tax rates are difficult to determine and can vary significantly within jurisdictions.
Any change to the company tax rate would have several different effects given the different roles the company tax rate performs, in particular, taxing inbound foreign investment and operating as a withholding tax on income derived by domestic investors.