Understanding what drives the amount of corporate income tax paid by companies has become increasingly important in recent years as governments adapt their policies to encourage growth, while recognising the need to raise revenues to fund social investment programmes and to repair public finances in the wake of the global economic downturn. It is important to recognise and understand the impact of tax policies on the revenues received by governments, revenues that governments rely on to enable them to discharge their obligations to provide funding for infrastructure, education and public health. This includes the need to ensure that the tax system provides an economic environment which fosters economic growth, helping to increase the size of the economy from which revenues can be drawn.
For companies, this has become important as they come under increased scrutiny over how much tax they pay and whether they are paying the ‘right amount of tax’. For companies the amount of tax that they pay represents a key element of the contribution that they make to the economies in which they operate. Taxes are a cost that has to be managed like any other cost, and the level of taxes paid is one of a number of factors that are taken into account when making decisions on where, when and how much to invest.
Over the last seven years PwC has worked with the World Bank on the “Paying Taxes” study which measures and compares how easy it is to pay taxes in 183 economies around the world using a case study company with a standard fact pattern. The study looks at all of the taxes that a company might pay including corporate income tax. It showns a consistent downward trend in the statutory rates of corporate income tax which have been applied over the last seven years, as governments have looked to ensure their tax systems remain competitive in a globalising economy. Another consistent feature of the results of the study is that the amount of corporate income tax actually paid can often be different and on occasions very different from the amount derived by simply multiplying the accounting profit by the headline rate of corporate income tax.
The results are quite striking
They show how the downward trend in statutory rates has resulted in those now applied falling within a fairly narrow range. More than half of the economies around the world have a statutory corporate income tax rate between 15% and 30%. And as regards the rate of tax actually paid by the company, the study identifies 40% of economies which make adjustments which increase the amount of tax paid while 60% reduce it. PwC’s analysis identifies the key reasons for these differences and provides some interesting insights on a regional basis and for a selection of individual economies.
It will be interesting to see how corporate income tax regimes around the world continue to develop, and whether the need for governments to demonstrate that their systems are competitive takes priority over the need to generate much needed funds.
Political leaders rarely campaign for office on a platform of government effectiveness. In many cases, tackling the bureaucracy is perceived as high risk and low reward compared with passing new laws in the legislature. Yet few succeed without achieving some reform. Many departing presidents, prime ministers, and cabinet secretaries reflect on how the engine of government itself was at the very heart of their successes or failures.
What it takes
Those that have achieved sustainable and significantly higher levels of government performance did so by explicitly designing and executing multiyear reforms that push beyond everyday initiatives designed to improve management capability.
McKinsey recently published a report – “Government designed for new times” in which they identify 40 such programs that have been enacted around the world in the past two decades. There were a number of objectives these programs were designed to achieve: significant fiscal consolidation, better outcomes across multiple public services, and economic growth. Here is a map of programs in a selected number of countries that McKinsey has put together:
How much control should political leaders have over government effectiveness?
The intense pressure for reform makes innovation a critical capability. In many areas, government agencies around the world are redesigning how services are delivered (for example, through one-stop shops and e-portals) by providing greater data availability and through mobile services that allow citizens to get instant help and support. McKinsey shows that Governments that are willing to reform and build such capabilities are better able to achieve major breakthroughs in the most fundamental policy areas, even in the absence of new policy or legislation.
I would raise a question mark whether such a discussion should take place from the very beginning. Should government agencies look at themselves for making their services more efficient or should this fall under political control? Let’s consider that, regardless of the fiscal policy, efficiency of the fiscal agencies should follow a consistent improvement track so the question is: should its efficiency be influenced by the policy itself?
As companies globalise, they face a growing body of diverse and complex regulations. The global regulatory environment is changing faster than companies can absorb. This is why CEOs consistently report overregulation as a threat to business growth. And it’s not getting any easier; according to the CEO Survey, only 31% of CEOs believe that regulations will be harmonised among governments. However, the successes of the private and public sectors are increasingly intertwined. Effective partnership models are emerging around the world, ranging from improved communication and better coordination to true collaboration, depending on the market.
71% of CEOs plan to increase investment in an area they also believe is one of the government’s top-three priorities: developing a skilled workforce. And increasingly, governments are making this a top priority. Countries as well as companies are competing for talent, and some governments are investing a lot to make their workforces more competitive. For example, the Singapore government partnered with a local university to launch a talent development programme, bringing together professional services firms, universities and business schools.
Workforce skilling is just one area of focus. Intellectual property, health care, energy, infrastructure, immigration, tax, financial sector convergence… these are major areas in which leaders from both public and private sector organisations say they can work together more effectively to achieve common goals.
Many governments in emerging markets mistakenly believe that they can reduce the level of informality by forgiving past tax debts of companies that come forward. Turkey, for instance, has had ten tax amnesties since 1963—one nearly every four years—and five social-security amnesties since 1983. Their provisions included the right to base the payment of past taxes on historical values of Turkey’s currency, the lira. Given the country’s high inflation rates, this approach greatly reduces the amount businesses have to pay. A McKinsey study shows that governments make ongoing enforcement more difficult with such measures, since companies wait for the next amnesty before coming clean.
In developed countries, the penalties are usually two to three times the amount of the evaded taxes, coupled with imprisonment if the evasion is persistent or involves more than a set amount. Tax evaders in emerging markets often get by with a slap on the wrist; in Turkey, for instance, the fine for VAT evasion is less than $20.
Probably corruption has also something to do with how evasion is considered in emerging economies. What do you think?
Around 15 specialized companies are currently doing lobby activities in Romania, on a market amounting between EUR 5 – 10 million, according to Liviu Mihaileanu, lobby specialist, but its future growth potential is impressive.
Mihaileanu, co-author of the book “Regulating lobby activities. On the influence hallway”, and co-author of “Lobby in Romania” study estimates the lobby market can soar to EUR 70 million.
“Unfortunately, the lobby activity in Romania was carried out for many years in the “shadows”, and companies doing this have not been transparent,” says Mihaileanu. “Most companies and NGOs prefer to “try” lobby activities through their own means without seeking professional help,” he adds.
Romanian Tax, Law & Lobby, an event organized by Business Review on March 29, will try to gauge the potential of the lobby market in Romania, in the same time seeing if this activity needs tighter regulation.
Roberto Musneci, senior partner at consultancy Serban & Musneci, and Aurelian Horja, communication consultant, co-author of “Lobby in Romania” study will be among the guest speakers that will shed some light in this field.
The event will also address the latest legal and fiscal changes that impact the business community.
Finding finance for your business in uncertain times poses a challenge so Business Review organizes in the same day a special workshop on Access to Finance, focusing on Public Private Partnerships, EU funds and State Aid.
Government leadership in building infrastructure is critical for competitiveness. A majority of CEOs identified the priority for the governments of all countries outside of Western Europe and Japan, where infrastructure is well developed, and of China – where the government allocated almost US$600 billion of stimulus spending for infrastructure projects over the past two years, according to PwC’s 14 Annual CEO Survey.
The role of private capital in financing infrastructure is unavoidable: an estimated US$3 trillion per year needs to be spent on infrastructure across the globe in the coming decades, according to a recent report from the World Economic Forum.
However, businesses can provide more than cash: they have expertise, and the abilities to execute and manage risks. This is part of what makes PPPs attractive. As Berthold Leetfink, Deputy Secretary General of the Ministry of Economics, Agriculture and Innovation in the Netherlands told PwC, “At least for the Netherlands, and I think for many other countries, planning and building infrastructure is very much in the hands of government. But it’s obvious that the private sector has a lot of knowledge in terms of building cheaply, efficiently or in a more environmentally friendly way.” As an example, a PPP project in 2009 to connect a 12-mile regional rapid transit line in Vancouver (Canada Line) was completed several months ahead of schedule.
Needless to say, businesses also have a key expectation for their governments: to tackle fiscal deficits to restore stability to the markets in a way that is mindful of the fragile environment for global growth. Public revenues are of course expected to be part of the equation: a majority of CEOs expect taxes will rise, led by 65% of CEOs in Asia and 70% in Latin America.
Last year I published an article in Forbes where I stated that the next step lobbyists are going to take in Romania, in order to avoid a lobbying law, will be to announce a self regulation initiative. Recently, during a conference dedicated to assessing the opportunity of a lobbying law in Romania, one of the lobbyists publicly announced that a voluntary registry of lobbying activities is going to be open by lobbyists themselves.
How will this make lobbying more transparent and why do lobbyists prefer self regulation instead of a law with similar conditions?
Possible answers in the attached article (Romanian only). Download a PDF version from here.
In the early 1990s, Sweden suffered its deepest recession since the Great Depression. Although the Swedish crisis was homegrown, its causes and effects resemble the events unfolding in the world today. After years of strong domestic growth driven by easy credit and high leverage, a real-estate bubble burst, leading to the collapse and partial nationalization of the banking sector. Domestic demand plunged as the household savings ratio soared by 13%. In three years, public debt doubled, unemployment tripled, and the government budget deficit increased tenfold, to more than 10% of GDP, the largest in any OECD country at the time.
Göran Persson was appointed finance minister after the 1994 elections, and became prime minister two years later. In order to regain the confidence of international lenders (and so pave the way for stability and sustainable growth) he knew that Sweden had to reduce its budget deficit dramatically. It took four years for the Swedish government to balance its budget. By 2006 the country had almost halved its public debt.
Persson recently spoke about what it takes to improve the way the public sector works and here are some of the lessons learned that he shared with McKinsey Quarterly:
First, as Persson says, you must make it clear that you are responsible for the process and that you are prepared to put your position at stake.
Second, the consolidation program must be designed so that the burdens are shared fairly. Public support for tough policies would quickly deteriorate if they were not perceived as fair.
Third, the consolidation program has to be designed as a comprehensive package: by presenting the measures together, it becomes clear to all interest groups that they are not the only ones being asked to make sacrifices. Also, by starting with the most difficult measures, you demonstrate your resolve and increase the chances of achieving the early results, which will be important for getting the continued support that is critical for sustaining the effort.
Transparency is the fourth lesson: never play down the effects of the program’s measures, be completely honest when you communicate with financial markets, clarify assumptions and calculations.
When talking about crisis opportunities, Persson admitted that the cuts in government consumption became a driver of improved efficiency, since public authorities were forced to do the same job on unchanged or reduced budgets and he mentions three of the strategies pursued:
1) One strategy aiming to improve productivity, service quality, and freedom of choice involved the liberalization of telecommunications, mail, railways, and other infrastructure industries. It also involved allowing privately run providers to compete with public ones in providing tax-financed services for the school system, health care, child care, and care for the elderly.
2) Another measure was to introduce information technology to broad layers of the population through a tax-deduction scheme that allowed workers to obtain a home computer under a favorable leasing agreement with their employers. The penetration of IT in Sweden during these years outpaced every other country in the world, which made it possible for authorities like the Tax Agency to go online at an early stage. More and more of the communication between Swedish public agencies and citizens now takes place on the Web, and many Swedes do their annual tax submissions over the Internet, allowing for a very efficient processing of taxes.
3) A third strategy was to give people with basic schooling the chance to complete a secondary education that would qualify them for university studies. More than 10% of the workforce seized this opportunity between 1997 and 2002. When the business cycle turned up again, they became a very good resource on the labor market, not least in the public sector. This education scheme served a dual purpose: it eased the pain of unemployment and increased Sweden’s long-term competitiveness by lifting the average competence level of the workforce.
Göran Persson also commented on his experience with trying to get the civil servants on board and making them partners in the initiative, changes in the way government worked and the way it developed and delivered its services, and influencing change at ministries that were not making good on their efficiency targets.