The annual Individual Income Tax and Social Security Rate Survey produced by KPMG’s International Executive Services (IES) practice shows this is only the third time that an increase has been observed over the past ten years that KPMG’s survey has been produced.
“In large part, this upward tick in personal tax rates is the result of a lack of economic recovery and increasing debt concerns,” says Brad Maxwell, a partner with KPMG’s IES practice in Switzerland. “Many economies deemed it necessary to increase their highest rate of personal income tax through one of two approaches: either through the creation of new income tax rate bands for very high income earners, or through the introduction of temporary taxes to address immediate budgetary deficit concerns.”
The most prominent examples of this pointed out in the survey are seen in the recent French and Spanish reforms.
France’s reforms saw the introduction of two new tax rate bands for high income earners which has resulted in the top rate increasing from 41 percent to 45 percent. The rate increases are generally deemed as an ‘exceptional contribution’ which affects individuals reporting incomes of above EUR250,000.
Maxwell notes, “Further increases may be the horizon, with incoming President François Hollande considering the introduction of a 75 percent tax rate band for taxpayers earning over EUR1,000,000.”
Starting in January 2012, Spain’s ‘complimentary tax’ aims to help address the country’s public deficit. The tax applies to all taxpayers, and ranges from 0.75 percent to 7 percent depending on the individual’s income level. This effectively means that the rate of tax for individuals earning above EUR300,000 has risen from 45 percent to 52 percent.
Elsewhere in Europe, there is very little change. Western Europe continues to have the highest personal tax rates of any sub-region globally (46.1 percent).
The average rate for Eastern Europe (16.7 percent) is still less than half of that of other European sub-regions, largely due to the prevalence of low flat tax initiatives. Poland and the Ukraine are notable for being the only two Eastern European countries of those surveyed to maintain a progressive tax band structure.
In Northern Europe, the average top personal income tax rate is 36.5 percent. Very little movement was observed in this sub-region during 2012, with the only changes being on the municipal front, as combined rates in Finland, Sweden and Iceland all experienced minor adjustments.
“Change, however, is on the way in the United Kingdom where the government has already announced plans to reduce the current top tax rate from 50 percent down to 45 percent effective April 2013,” notes Maxwell.
Aside from the changes in Spain, rates in Southern Europe have remained relatively stable at an average of 31.7 percent. Interestingly, while the world’s eyes have been keenly focused on Greece’s economy for much of 2012, the country’s top rate has remained unchanged at 45 percent since 2010 when it was increased from 40 percent.
Western Asia has also seen some movement in tax rates over the past year. In October 2011 (shortly after the publication of last year’s survey), Cyprus increased its top marginal income tax rate from 30 percent to 35 percent, and applied the change retroactively from 1 January 2011. In 2012, Armenia also raised its tax rate by 5 percent and plans to introduce a further 1 percent increase in 2013. Israel also increased its top marginal tax rate (by three percentage points to 48 percent) and Georgia, which has not altered its top rate of tax for several years, signaled an intention to decrease its rate from 20 to 18 percent effective 2013.
While the remainder of Asia was largely quiet on the rate change front, South Korea introduced an additional tax band with a 3 percent increase in an effort to target high earners as a source of additional revenue. Hong Kong and Singapore continue to offer very attractive personal income tax rates, and rates remained constant in the other Asian heavyweights (China, Japan and India) who have not altered their top rate of tax in the last ten years.
However, there are indications that this trend is set to change with permanent residents of Japan soon becoming subject to a Special Reconstruction Surtax which will start next year with the intention of helping fund the rebuild in the aftermath of the Great East Japan Earthquake.
Aside from the Fijian reforms mentioned above, top rates in the Oceania region remain stable.
Some change has been noted in Africa with Egypt introducing a new 25 percent tax band to target super high income earners, and Zimbabwe increasing its top tax rate by over 10 percent (bringing it back in line with 2008 levels).
Top rates across North America remained relatively unchanged throughout the year, though Canada’s most populated province (Ontario) recently announced a hike for high income earners which will increase the top combined federal and provincial rate by 1.56 percent, putting the jurisdiction onto the list of locations that introduced an additional tax band for its highest earners in 2012.
And while there were no changes to top federal rates in the United States in 2012, the Bush
Tax Cuts are once again scheduled to expire at year’s end meaning that, if the expiration remains on schedule, the top US Federal tax rate would increase from 35 percent to 39.6 percent in 2013.
Overall, Latin America has also kept top rates constant during 2012, though we note that Mexico is scheduled to decrease its top rate from 30 percent to 29 percent next year, and a further reduction to 28 percent is scheduled for 2014. Guatemala is also scheduled to decrease its top rate in 2013.
The survey shows that the highest income tax rates in the world are seen in the small Caribbean island of Aruba with a top rate of 58.95 percent, Other countries with top rates in excess of 50 percent are largely European: Sweden (56.6 percent rate), Denmark (55.4 percent rate), Netherlands (55 percent rate), Austria (50 percent rate), Belgium (50 percent rate) and United Kingdom (50 percent rate). There were exceptions to this from Asia and Africa, specifically Japan (50 percent rate), and new survey participant Senegal (50 percent rate).
“While these top rates may appear high, it is important to remember that a country’s highest personal income tax rate is only one indicator of what taxes individuals may pay on their income,” says Maxwell. “Just as influential are which other taxes may apply and on which income thresholds those rates are charged."
KPMG’s Individual Income Tax and Social Security Rate Survey is a cross-border survey of personal tax and social security rates with historical data from 2003-2012. The report covers 114 countries, concentrating on the highest level of personal tax payable to the central government.
The study was commissioned by KPMG’s IES practice, comprising professionals from across our global network of member firms.
View a copy of the survey or visit our online tax rate tool for easy corporate, indirect and individual income tax rate comparisons and analysis.
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