2017 International Tax Competitiveness Index
The structure of a country’s tax code is an important determinant of its economic performance. A well-structured tax code is easy for taxpayers to comply with and can promote economic development, while raising sufficient revenue for a government’s priorities. In contrast, poorly structured tax systems can be costly, distort economic decision-making, and harm domestic economies.
Many countries have recognized this and have reformed their tax codes. Over the past few decades, marginal tax rates on corporate and individual income have declined significantly across the Organisation for Economic Co-operation and Development (OECD). Now, most nations raise a significant amount of revenue from broad-based taxes such as payroll taxes and value-added taxes (VAT).
New Zealand is a good example of a country that has reformed its tax system. In a 2010 presentation, the chief economist of the New Zealand Treasury stated, “Global trends in corporate and personal taxes are making New Zealand’s system less internationally competitive.” In response to these global trends, New Zealand cut its top marginal individual income tax rate from 38 percent to 33 percent, shifted to a greater reliance on the goods and services tax, and cut its corporate tax rate to 28 percent from 30 percent. New Zealand added these changes to a tax system that already had multiple competitive features, including no inheritance tax, no general capital gains tax, and no payroll taxes.
Some nations, however, have not kept up with the global trend. The United States, for example, has not reduced its federal corporate income tax rate from 35 percent since the early 1990s. As a result, its combined federal, state, and local corporate tax rate of about 39 percent is significantly higher than the average rate of 25 percent among OECD nations. In addition, as most OECD nations have moved to a territorial tax system, the United States has continued to tax the worldwide profits of its domestic corporations.
Other nations have moved further from well-structured tax policy. Over the last few decades, France has introduced a number of reforms that have significantly increased marginal tax rates on work, saving, and investment. For example, France recently instituted a corporate income surtax, which joined other distortive taxes such as the financial transactions tax, a net wealth tax, and an inheritance tax.
The International Tax Competitiveness Index
The International Tax Competitiveness Index (ITCI) seeks to measure the extent to which a country’s tax system adheres to two important aspects of tax policy: competitiveness and neutrality.
A competitive tax code is one that keeps marginal tax rates low. In today’s globalized world, capital is highly mobile. Businesses can choose to invest in any number of countries throughout the world to find the highest rate of return. This means that businesses will look for countries with lower tax rates on investment to maximize their after-tax rate of return. If a country’s tax rate is too high, it will drive investment elsewhere, leading to slower economic growth. In addition, high marginal tax rates can lead to tax avoidance.
A neutral tax code is simply one that seeks to raise the most revenue with the fewest economic distortions. This means that it doesn’t favor consumption over saving, as happens with investment taxes and wealth taxes. This also means few or no targeted tax breaks for specific activities carried out by businesses or individuals.
A tax code that is competitive and neutral promotes sustainable economic growth and investment while raising sufficient revenue for government priorities.
There are many factors unrelated to taxes which affect a country’s economic performance. Nevertheless, taxes play an important role in the health of a country’s economy.
To measure whether a country’s tax system is neutral and competitive, the ITCI looks at more than 40 tax policy variables. These variables measure not only the level of taxes, but also how taxes are structured. The Index looks at a country’s corporate taxes, individual income taxes, consumption taxes, property taxes, and the treatment of profits earned overseas. The ITCI gives a comprehensive overview of how developed countries’ tax codes compare, explains why certain tax codes stand out as good or bad models for reform, and provides important insight into how to think about tax policy.
|Country||Overall Rank||Overall Score||Corporate Tax Rank||Consumption Taxes Rank||Property Taxes Rank||Individual Taxes Rank||International Tax Rules Rank|
For the fourth year in a row, Estonia has the best tax code in the OECD. Its top score is driven by four positive features of its tax code. First, it has a 20 percent tax rate on corporate income that is only applied to distributed profits. Second, it has a flat 20 percent tax on individual income that does not apply to personal dividend income. Third, its property tax applies only to the value of land, rather than to the value of real property or capital. Finally, it has a territorial tax system that exempts 100 percent of foreign profits earned by domestic corporations from domestic taxation, with few restrictions.
While Estonia’s tax system is unique in the OECD, the other top countries’ tax systems receive high scores due to excellence in one or more of the major tax categories. New Zealand has a relatively flat, low-rate individual income tax that also exempts capital gains (with a combined top rate of 33 percent), a well-structured property tax, and a broad-based value-added tax. Latvia, which recently joined the OECD, has a relatively low corporate tax rate of 15 percent, speedy cost recovery, and a flat individual income tax. Switzerland has a relatively low corporate tax rate (21.1 percent), a low, broad-based consumption tax, and a relatively flat individual income tax that exempts capital gains from taxation. Sweden has a lower-than-average corporate income tax rate of 22 percent, no estate or wealth taxes, and a well-structured value-added tax and individual income tax.
For the fourth year in a row, France has the least competitive tax system in the OECD. It has one of the highest corporate income tax rates in the OECD (34.4 percent), high property taxes, an annual net wealth tax, a financial transaction tax, and an estate tax. France also has high, progressive individual income taxes that apply to both dividend and capital gains income.
In general, countries that rank poorly on the ITCI levy relatively high marginal tax rates on corporate income. The five countries at the bottom of the rankings all have higher than average corporate tax rates, except for Poland at 19 percent. In addition, all five countries have high consumption taxes, with rates of 20 percent or higher, except for Chile at 19 percent.
Notable Changes from Last Year
Since last year, several countries’ tax codes have undergone notable changes that have impacted their rankings. Table 2, below, shows both the rank and score changes for each country from last year and 2015.
|Country||2015 Rank||2015 Score||2016 Rank||2016 Score||2017 Rank||2017 Score||Change in Rank||Change in Score|
- Austria substantially reduced the complexity of its VAT as measured by hours spent on compliance, which helped drive an improvement from 16th to 13th.
- Chile continued the implementation of its 2014 Tax Reform Law, increasing the top corporate rate from 24 percent to 25 percent (rising to 27 percent in 2018) and creating two separate corporate tax systems, an attributed income system and a partially integrated system. Net operating loss carrybacks have also been eliminated. As a result, Chile fell three places, from 29th to 32nd.
- The Czech Republic amended its income tax law to allow the deductibility of tax losses from the sale of shares by nonresidents, and compliance hours fell significantly for both corporate and individual income taxes. These changes drove an improvement of four places, from 13th to 9th.
- Greece raised its VAT rate one percentage point, to 24 percent. The top individual income tax rate rose from 50 to 55 percent, while the capital gains tax increased from 15 to 25 percent. The country’s dividend withholding rate increased from 10 to 15 percent. The corporate tax rate is scheduled to decline from 29 to 26 percent in 2019. Because other countries with low rankings on the ITCI also adopted changes which hurt their scores, Greece did not decline in ranking.
- Hungary converted its two-rate corporate tax, with a top rate of 19 percent, into a 9 percent flat tax. This rate reduction resulted in an improvement of three places, from 23rd to 20th.
- Israel fell one spot, from 25th to 26th. That was driven by the introduction of a “patent box,” which provides a special rate of 6 percent on profits attributable to patents.
- Japan reduced the amount of losses that can be carried forward to subsequent years, ratcheting the cap down from 80 to 55 percent. However, compliance time declined substantially across all tax categories, and Japan expanded its treaty network, leading to an improvement of four places, from 26th to 22nd.
- Latvia capped net operating loss carryforwards at 75 percent of losses and its VAT base shrunk, leading the country to slip one place, from 3rd to 4th overall.
- Luxembourg cut its statutory corporate income tax rate from 21 to 19 percent, leading to an overall corporate tax rate of 27.08 percent, down from 29.22 percent (taking surtaxes and municipal business taxes into account). At the same time, however, the minimum net wealth tax increased and net operating loss carryforwards were limited to 17 years. Despite the latter changes, the lower corporate rate drove a two-spot improvement, from 7th to 5th.
- In the Netherlands, the implementation of the 2017 Dutch Tax Package brought modest increases in individual income and dividend tax rates, which contributed to a modest slide, from 6th to 8th overall.
- The Slovak Republic reduced its corporate income tax rate from 22 to 21 percent. However, the country now taxes foreign-earned dividend income at a rate of 35 percent for nontreaty jurisdictions and 7 percent for treaty jurisdictions. These policy changes offset, and the Slovak Republic remains 10th overall.
- Slovenia adopted a corporate tax increase, raising the rate from 17 to 19 percent. As a result, Slovenia slipped four places, from 14th to 18th.
- The United Kingdom, which determines its corporation tax rate each year, reduced the rate from 20 to 19 percent, with a larger reduction in capital gains taxation. These changes drove an improvement of three places, from 17th to 14th.
 Norman Gemmell, “Tax Reform in New Zealand: Current Developments” (June 2010), https://web.archive.org/web/20160429192333/http://www.victoria.ac.nz/sacl/about/cpf/publications/pdfs/4GemmellPostHenrypaper.pdf.
 Organisation for Economic Co-operation and Development, “OECD Tax Database Table II.1 – Corporate income tax rates: basic/non-targeted 2000-2017,” updated April 2017, http://www.oecd.org/tax/tax-policy/tax-database.htm.
 Due to some data limitations, some more recent tax changes in some countries may not be reflected in this year’s version of the International Tax Competitiveness Index. Last year’s scores published in this report can differ from previously published rankings due to both methodological changes and corrections made to previous years’ data.
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