Minimal change to corporate tax rates expected in spite of global tax infrastructure reform says RSM research

08 December 2014

The majority of tax advisers expect corporate tax rates to remain relatively unchanged over the next three years, according to research by RSM, the seventh largest global network of independent audit, tax and advisory firms. This is in spite of global tax reform led by the OECD aimed at targeting tax avoidance by multinational corporations.

RSM analysed the views of its tax partners from 54 countries in its report, The Evolution of Tax. Latvian experts anticipate that corporate income tax rate will stay unchanged over the next three years. This compares to nearly three quarters (72%) of international advisers, who expect their country’s corporate rates to stay about the same, while a fifth expect a decline and just 8% forecast a marginal increase.

Dace Merhele, tax partner at Merhels, ranked ‘Tax avoidance and the cash economy’ as the number one concern for Latvia in the near future. Interestingly, in Europe more widely, the same issue is considered to be the main concern as well. Dace Merhele further says: “Latvia is a small and open economy which competes heavily for foreign direct investments. For example, 15% corporate income tax rate is one of the lowest in Europe and these days Latvia has very competitive tax regime for holding companies. It all contributes to attraction of investments. However, while reducing, tax avoidance and the cash economy still are at visible levels which hinder fair competition. Hence I strongly feel that this issue should be at pole position for law enforcers. As Latvia progresses towards membership with OECD, I suppose that law makers should be open to implementation of BEPS (base erosion and profit shifting) initiatives. Nevertheless, I do not expect big changes in the short term since law makers at least in words wish to maintain stability and predictability of the local tax code”.

On a global basis, advisers in Latin America, Middle East and North Africa (MENA) and Sub-Saharan Africa expect the least change to their corporate tax rates in the next three years (80%). In the G7, advisers are split in their predictions between a reduction of one to five percentage points, and rates remaining the same [1]. Advisers in the BRIC economies all expect their rates to see little change.

Tax experts recognise that there will be huge challenges in implementing the OECD’s tax proposals. There is concern about the practicalities that governments will face because tax policy is a key component of their economic management and the OECD’s proposals involve giving up some of that national control in favour of a more global policy outcome. Detailed negotiations between countries on double tax agreements is also expected be difficult.

Companies will be burdened by issues such as the requirement to disclose their transfer pricing policies in far greater detail. They will also be challenged by proposals to neutralise the impact of hybrid tax mismatch arrangements, where double deductions are obtained for the same amount, for instance, which require detailed cross-border understanding and agreement between countries.

Jean Stephens, Chief Executive Officer of RSM International, comments: “The global tax system was built for an industrial age dominated by western powers and is no longer fit for purpose in the increasingly globalised, internet-driven, economy. We applaud the OECD’s unprecedented reform objectives and its inclusion of developing economies in its proposals, but it is clear that agreement and implementation will be very tough for governments and companies across the world.”

Specialists at Merhels expect further rise in the number of double tax treaties between Latvia and other countries. More broadly, advisers in MENA and Latin America predict there to be little change to these agreements. However, most European advisers do anticipate an increase in the number of their treaties.

While governments are also scrutinising tax avoidance among the wealthy, we at Merhels do not expect neither the mechanism, nor the income tax rates to change substantially over the next three years. Over two thirds of RSM’s partners (68%) anticipate their country’s rate will remain static and only 13% expect an increase. Of the G7 and BRIC economies, only Germany expects an increased tax rate for high earners.

Click here to access the full report.

1 Canada not included in G7 analysis as RSM does not have a member firm in the country.