The proper mix and balance of taxes within a jurisdiction has been a topic of considerable debate in the international tax community over. Corporate tax revenues have been subject to dramatic swings over recent years as a result of both rises and falls in economic activity and because corporate tax measures have been used as a political tool used to get votes and grab headlines.
One aspect of the tax mix debate that has come under increasing scrutiny is the relationship between a country's corporate tax rate and the level of VAT/ GST tax. Across the globe indirect taxes such as VAT or sales tax have risen in percentage terms, whilst corporate tax rates have been lowered over the last decade. Nowhere has this change been more recently apparent than in Asia.
Japan has traditionally had one of the highest corporate tax rates in the world at 36%. The sales tax rate was increased to 8% in April 2014 (the first rate hike in over 17 years from a level of 5%) with the aim of reducing the country's extremely high national debt. However, it resulted in a significant drop-off in consumer spending, throwing the country into a deeper economic recession. The proposal to raise the rate again, to 10%, in October of 2015, has now been postponed for a further eighteen months. At the same time, the Japanese government announced a reduction in its corporate tax rate of 2.5 percentage points, making it lower than the US rate.
More broadly, Malaysia is set to introduce a sales tax of 6% today, for goods and services, and also announced a reduction of their corporate tax rate by 1 percentage point. Pilot sales taxes have been introduced in parts of China and the Indian government announced in its latest budget its commitment to the introduction of GST by 2016, alongside a reduction in corporate taxes.
While it is hard to argue that lower corporate tax rates are good for businesses, sales taxes are justifiably criticized for being the most regressive of taxes (although certain means of implementing such taxes can blunt this impact), and increasing VAT rates often has knock on consequences for sales. Indirect taxes can impact industries in different ways – depending on whether the goods sold fall under the remit of the tax, whether that be financial services, construction or consumer products. This was seen with Microsoft, who stated in their results statement that sales had fallen and revenues in Japan had been hit by the VAT changes.
These developments in Asia seem to be, on the whole, positive. While governments can use low corporate tax rates to entice businesses to operate in certain jurisdictions, there is no question that they need to see taxes as a whole. It has been said that there is no such thing as a good tax, only less bad taxes, and a multistage sales tax like a GST is widely considered an efficient national tax the "least bad" of taxes, and when combined with the removal or reduction of inefficient state taxes, can have positive impacts on economic activity and standards of living. Looking solely at the level of corporate tax is not a true reflection of the underlying impact of the taxes associated with doing business in a region.
By Tim Wach, Global Managing Director, Taxand, the world's largest independent global organisation of specialist tax advisors to multinational businesses.