Commentary

Even while most countries are experiencing intense pressure to maintain revenue collections amid the economic downturn, we continue to see countries reducing their corporate tax rates. In all, nine of the 24 countries we reviewed have instituted some form of lower tax rate. This continuation of an ongoing worldwide trend toward lower corporate tax rates (90% of OECD countries reduced their rates between 2000 and 2009) likely indicates two things: (1) despite economic challenges, international competition for jobs and investment remains an important goal for many countries and (2) countries believe that lower tax rates support businesses, stimulate overall demand and encourage investment.

It is important to note that reductions in corporate tax rates can reduce the value of deferred tax assets, such as net operating loss carryforwards. At the same time, though, lower tax rates will also reduce the value of deferred tax liabilities, such as those created by accelerated depreciation or unrepatriated income that has not been permanently reinvested. Tax directors should include these factors into any analysis concerning tax rate reductions.

Countries adjusting corporate tax rates

• Canada
• The Czech Republic
• Hungary
• Italy
• Japan
• Netherlands
• Russia
• Singapore
• South Korea
• Taiwan

Highlights

• Some countries are choosing to phase in their rate reductions, apparently in the expectation that the government revenue impact of the reductions will be offset as the economy improves. For example, South Korea’s rate is dropping from 25% to 22% in 2009 before dropping again to 20% in 2010. Similarly, the Czech Republic’s two-percentage-point reduction will be phased in over two years.
• Other countries, like Canada, have not announced any new federal corporate rate reductions, but have chosen to move forward with previously approved rate reductions (19% in 2009, 18% in 2010, 16.5% in 2011, 15% in 2012). In doing so, Canada confirmed its commitment to becoming the lowest corporate taxing jurisdiction among the major industrialized economies, with the goal of a 25% combined federal-provincial statutory rate by 2012.
• While most rate reductions have addressed the full spectrum of taxpayers, in some cases the rate reductions are limited to small-and medium-sized enterprises. In Japan, for example, the tax rate was lowered to 18% only for companies with income up to 8 million¥ (€60,000). In the Netherlands, a 20% tax rate is proposed for taxable income up to €200,000 for 2009-2010. However, a 25% rate will apply for taxable income above €200,000. In 2008, the 20% rate was, in fact, applicable for taxable income up to €275,000.
• Japan recently enacted a 95% exemption of foreign-source dividends. This change is intended to encourage Japanese multinational corporations to repatriate their foreign earnings.
• Facing extreme concerns with regard to budget and the value of its currency, Hungary has proposed actually raising its corporate income tax rate from 16% to 19% and is proposing to eliminate certain tax-base-decreasing items. (Its 4% solidarity surtax would cease in the meantime.) Despite similar budgetary conditions, the Irish government reaffirmed its commitment to its 12.5% corporate tax rate, while increasing some individual tax payments via a levy mechanism. As budget difficulties become more severe, many countries — particularly those with less diverse and robust economies — will need to determine whether corporate tax rate increases or adjustments to the tax base will be necessary to address growing deficits.

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