9th November 2020
International markets can provide a wealth of lucrative opportunities for staffing companies, but the nuances in tax legislation can also present a number of challenges. There are, however, a number of resources that can help recruiters find out more about a country’s tax landscape, with the International Tax Competitiveness Index one such example.
The latest International Tax Competitiveness Index (ITCI)
The ITCI measures how much a location’s tax system adheres to two critical elements of all tax policy, namely competitiveness and neutrality. As a summary, a tax code is considered competitive if marginal tax rates are low, which would encourage global businesses to invest in the country. For a tax code to be considered neutral, it must not “seek to raise the most revenue with the fewest economic distortions.” Or in other words, it shouldn’t favour consumption over savings – something you expect with investment taxes, for example.
With global authorities worldwide constantly battling to tackle tax fraud, the latest International Tax Competitiveness Index provides an insight into which countries are getting it right, and which locations are likely to make further adjustments to create neutral and competitive tax codes.
Here are some of the stand out locations in the 2020 rankings.
The country has topped the list of best tax codes in the OECD for the seventh year in a row, with the report identifying a number of strengths that set Estonia apart from other locations, including the fact its corporate income tax system only taxes distributed earnings. This means that companies can reinvest profits tax free. While it may have earned the top position, the ITCI did highlight some weaknesses in the country’s tax codes, including the fact that it only has tax treaties with 58 countries which is below the OECD average of 77.
Second on the list, Latvia was commended for its relatively flat labour taxes and its corporate income tax system which only taxes distributed earnings in a similar style to Estonia. Latvia’s limited number of tax treaties (62) was also highlighted as a weakness, as was the threshold for VAT, which is almost twice as high as the OECD average.
This particular location was lauded for the fact that it allows corporate losses to be carried forward indefinitely. New Zealand has also introduced a ‘one-year carry back provision’ temporarily which enables organisations to be taxed on average profitability. It does, however have an above average corporate tax rate (28%) and a limited tax treaty network (just 40 countries).
Securing fourth place on the list, Switzerland’s strengths include its wide tax treaty network – which currently includes 93 countries, well above the average. However, its progressive income tax – which has a top rate of 41.7%, including payroll and personal income – was identified as a significant weakness to its international tax competitiveness.
Completing the top five is Luxembourg, which was ranked highly for its extensive tax treaty network (83) and territorial tax system which exempts foreign dividends and capital gains. However, according to the rankings, companies in the country “are limited in the time period in which they can use net operating losses to offset future profits and are unable to use losses to offset past taxable income.”
Weakness identified in some countries
If we take a look at those locations that came in at the bottom of the rankings, there were a number of weaknesses that were identified by the report:
- France: With the highest corporate income tax rate of the OECD countries (32.02%) and a tax burden of 47.6%, France came in at number 32 in the 2020 rankings.
- Portugal: Some of the weaknesses that put this destination at the bottom of the list include its high corporate tax rate (31.5%) and the limitations on the amount of net operating losses that companies can offset.
- Poland: Number 34 on the list, Poland was penalised for the fact that organisations can only write off 33.8% of the cost of industrial buildings.
- Chile: According to the ITCI, labour and consumption taxes in Chile are complex and can create a serious compliance burden.
- Italy: The country came in last place for its international tax competitiveness, apparently due to its multiple distortionary property taxes and the fact that compliance with the personal income tax system takes 169 hours on average – well above the OECD average of 66 hours.
Why compliance is key
For staffing companies placing contractors internationally, the above information is useful, but no matter what a country’s international tax competitiveness ranking is, if there’s demand for your contractors in the location, it’s worth investigating. But, with tax compliance becoming increasingly complex, ensuring that you and those you employ are compliant wherever in the world you operate is key to prevent your firm facing potential fines or legal action.
Contact our team of experts today to find out how 6CATS International can help your recruitment business.