By Daniel Hunter
Addressing government budgetary deficit concerns, many countries around the world continue to either create new income tax rate bands for very high income tax earners or are introducing new temporary taxes.
According to KPMG International, the global average income tax rate increased again this year by 0.3 percent — the second year in a row. 2013 also marks the second highest quantity of rate increases (9 countries) since KPMG began collecting rate data in 2003.
But against this background upward trend, the UK moved in the opposite direction with the biggest top rate cut seen globally in 2013 reducing it from 50 percent to 45 percent and as a result from having the 5th joint highest top rate of personal tax in the EU to 11th joint highest.
The most highly publicised tax rate change for 2013 occurred in the US, where the expiration of Bush administration era tax cuts saw the highest federal rate increase from 35 percent to 39.6 percent. Slovenia holds the title of the greatest change moving up 9 percentage points from 41 percent to 50 percent.
“Targeting high income earners is a way for governments to gain revenue and be seen by taxpayers as doing something that is fair and necessary for the betterment of their country,” says René Philips, KPMG’s Global Head of International Executive Services.
India is one example to note with its introduction of a new temporary tax on high earners. For the 2013/14 fiscal year only, India has imposed a 10 percent surcharge on tax paid by individuals earning over INR1million. Similarly, the Czech Republic put in place a temporary tax, referred to as a ‘solidarity surcharge’ and applied at a rate of 7 percent to income exceeding CZK1,242,432.
In addition, Japan increased its highest rate by 0.84 percent due to the introduction of a ‘Special Reconstruction Surtax’ which the Japanese government introduced to help fund the cost of rebuilding after the Great East Japan Earthquake of 2011.
Latvia decreased its flat tax rate by 1 percent as part of a staggered move to reduce its rate from 25 percent to 20 percent by 2015, and Greece decreased its top rate by 3 percent (from 45 percent to 42 percent). While the top rate did decrease in Greece, the change was part of a wider move to restructure all tax rate bands. These changes saw tax rates increase at the lower and middle levels, to the extent that tax rates actually increased for all individuals earning under EUR 220,000 (despite the decrease in the top rate).
The most notable decrease occurred in the UK, where the top rate was reduced from 50 percent to 45 percent effective 6 April 2013. During its 3 years of operation, the UK’s 50 percent rate was widely criticised for driving high-earning individuals abroad and acting as a deterrent to entrepreneurship.
Similar criticism has been applied to the highly-publicised 75 percent tax bracket (on individuals earning over EUR 1million) proposed by French President, François, Hollande, over a year ago. In December 2012, France’s constitutional council ruled that the 75 percent rate was unconstitutional, and it is still unclear whether a tax on the “super rich” will be introduced in France in a different form.
Marc Burrows, Head of International Executive Services at KPMG in the UK, said: “Dropping the UK’s top rate from 50 percent to 45 percent enhanced the UK’s attractiveness to internationally mobile executives, as did a number of recent corporate tax reforms and rate cuts. In our view there is a point at which tax rates can squeeze taxpayers too hard and act as a disincentive to growth and investment. At 50 percent, the UK was probably at that point and lowering the rate thus removes this barrier to an extent although 45 percent is not the lowest rate around by any means.
“It’s important to remember that it’s not all about tax; the UK has a number of other attractions and is a very popular destination for senior globally mobile businesspeople. They like the culture here, the cities, the countryside, the shopping, the education system and even the weather. Amongst all these factors, the tax system too, plays a significant role in deciding where to locate so ensuring that we can compete on the global stage is crucial.”
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