By Daniel hunter

Over the past two years, the UK’s tax competitiveness has improved the most among major economies examined in a study conducted by KPMG International.

KPMG’s Competitive Alternatives 2012, Special Report: Focus on Tax, assesses the impact of all business taxes in 14 countries worldwide, building on data compiled for ten countries in 2010. Comparing this year’s results with the scores two years ago shows that the UK is the most improved.

The taxes analysed include corporate income taxes, capital taxes, sales taxes, property taxes and statutory labour costs to calculate a “total tax cost” which is compared between countries and cities using a Total Tax Index (TTI) for each location. The TTI is a measure of the total taxes paid by corporations in a particular location, expressed as a percentage of total taxes paid by corporations in the US. Thus, the United States has a TTI of 100.0, which represents the benchmark against which the other countries and cities are scored.

The lower the TTI, the more attractive the country from a business tax perspective. Overall, the UK was ranked 6th most attractive, ahead of the United States and all European countries analysed, with its score improving by almost 15 percentage points since 2010.

“This is good news for UK Plc and an endorsement of the Government’s tax policy," Chris Morgan, head of tax policy at KPMG in the UK, said.

"The significant change for the better is partly due to reductions in the corporate income tax rate here in the UK (which has reduced by 2 percent since 2010) as part of the Government’s stated objective of the having the lowest corporation tax rate in the G20. It is also due to lower industrial property values in 2012 which have resulted in a reduced burden for other corporate taxes.

“Things are definitely moving in the right direction. On the positive side there are developments such as the new ‘controlled foreign companies’ rules, which make it far more attractive to locate international businesses here, and the patent box regime, under which profits deriving from patents are taxed at a very attractive rate of just 10 percent.

"However,business still has some concerns on tax. It is far from clear how the proposed new general anti-abuse rule will operate for example. As currently drafted it could impact genuine commercial transactions which are implemented in a tax efficient way.

"Also, despite the reducing headline rate of corporation tax, some businesses operating in capital intensive industries have been left worse off in terms of the effective rate of tax they pay because the overall rate reduction is offset by the loss of ‘Industrial Buildings Allowances’ and the reduction in the general rates of capital allowance. They would very much welcome any move to restore some sort of allowance for capital expenditure, especially in key industries such as infrastructure and manufacturing.”

Manchester and London compared

The total tax burden can also vary from city to city within the same jurisdiction. The survey, which compared 113 cities from 14 countries, found that the tax burden spread between Cincinnati and San Francisco, for example, exceeded 25 percent; and the spread between Osaka and Tokyo was more than 20 percent, while the spread between Amsterdam and Rotterdam was a mere 0.5 percent.

In the UK, the survey examined Manchester and London. Manchester was given a TTI of 66.7, some 13 points lower than London. The difference was largely due to lower rates for “other corporate taxes” and “statutory labour costs” which are both based on actual business costs that would be incurred in the location and thus reflect the relative costs of labour and property values between Manchester and London.

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