The global decline in top personal income tax rates over the past seven years generally appears to have come to an end. This year’s average rate globally increased 0.3 percent signaling we are in the midst of a turnaround. The survey shows that the majority of rate movement in 2010 comes from Europe. The highest personal income taxes in the world are still paid by citizens of the European Union (EU) where average rates went up by 0.3 percent over the past year.
According to KPMG’s 2010 Individual Income Tax and Social Security Rate Survey, while tax rates remained static in most locations, the general upward moving trend within this year’s survey suggest governments are beginning to opt for a tax rate increase approach to combat deficit concerns.
“In considering where to locate workforces, tax is a crucial business issue,” says Brad Maxwell, partner at KPMG. “Tax authorities are under increasing pressure to identify and secure greater revenues. In response, they are becoming increasingly sophisticated and rigorous in the framing and application of the tax rules.”
The low flat tax initiatives of governments in Central & Eastern Europe (CEE) fuelling the historic downward trend have stagnated. Estonia which first created a flat tax in 1994 and intended to reduce the rate down to 18 percent by 2012 has since abolished its plan. In another example, Latvia increased rates raising its flat tax from 23 percent in 2009 to 26 percent in 2010.
However, the CEE region still has the lowest rates of personal tax. This combined with low corporate tax rates (compared to the rest of Europe) represents a positive factor for allocation of inward investments.
“Based on the proposed modification, the personal income tax rate in Hungary would be 16 percent from January 1, 2011”, adds Gabriella Nink, Tax Director at KPMG in Hungary. “This would apply to income within the consolidated tax base and that derived from other activity (for example: interest, dividends, capital gain, sale of real estate). The “super-gross” tax base would remain in place for 2011 in respect of the consolidated tax base, consequently the tax base should be increased by 27 percent, before applying the 16 percent tax rate, thus the effective tax rate in 2011 would be 20,32%. This tax increasing item would be lower in 2012, with the effective tax rate becoming 18,16% and following to 16% in 2013. “
“From 2011, income which is not taxable in Hungary based on an international treaty or reciprocity should not be declared at all.
Benefits in kind, as a concept, would be terminated from 2011. However, certain income would still be taxable in a way that the obligation would fall on the payer company.
The social security contribution rates would not change in 2011, however a limit (as yet not specified) is to be introduced for the employer’s part of social security contributions”, concluded Gabriella Nink.
In Western Europe, the upward trend initiated by Ireland last year has spread as anticipated. While the top Irish rate went up by 1 percent in 2010, the UK dominated headlines with a 10 percent increase raising its top rate from 40 percent in 2009/10 to 50 percent in 2010/11 – the highest rate increase seen globally this year.
Other Western European governments have followed suit in an attempt to increase tax revenues. Iceland, amid the collapse of the banking sector, replaced its flat tax regime with a progressive approach raising the top personal income tax rate by approximately 9 percent. Greece, in response to public deficit concerns, raised its top rate by 5 percent. Portugal, and most recently France raised top rates by 3 percent and 1 percent respectively to help address budget shortfalls. Even the Isle of Man, with a long standing top rate of 18 percent, saw a 2 percent increase to 20 percent in 2010/11. On the opposite end of the spectrum, Denmark opted for a stimulus package in hopes of increasing consumer spending and as a result, decreased its top rate by almost 7 percent. Croatia, this past July, also dropped its top rate by five percent.
After the Europeans, the next highest taxes are paid by the people of the Asia-Pacific region but the margin continues to spread. There was very little movement in 2010, but propelled by the 5 percent drop in New Zealand and a 1 percent drop in Malaysia, average top rates in Asia-Pacific declined by 0.4 percent in 2010. The rate competition in this region continues to be led by Hong Kong and Singapore.
Turning to Latin America, personal income taxes continue to remain relatively low; however, the region did not escape the upward rate development. A 2 percent decline in Panama was offset by a 2 percent increase in Mexico, but ultimately the 10 percent increase in Jamaica pushed average top rates up by 0.8 percent in 2010.
In terms of the highest income tax rates in the world, with the decrease in Danish rates, this spot is now held by the people of Sweden. The Swedes have a top personal income tax rate of over 56 percent in 2010. For the Asia-Pacific region, the top rate at 50 percent belongs to Japan. For Latin America region, the top rate at 40 percent goes to Chile.
Brad Maxell comments, “Whether the tax rate increases strike the right balance and have the intended impact has yet to be seen. Everyone may have a role to play in supporting their national deficit reduction measures but the fact that high income earners often have more mobility options should not be overlooked. Attracting such individuals, including their tax revenues and disposable income, using a competitive personal tax rate market while tackling budget deficits remains the challenge.”
KPMG’s 2010 Individual Income Tax and Social Security Rate Survey is a cross-border survey of personal tax and social security rates with historical data from 2005-2010. The report covers 86 countries, concentrating on the highest level of personal tax payable to the central government. For ease of comparison, the survey has excluded, where possible, other taxes such as state and municipal taxes.
The study was commissioned by the global International Executive Services practice, comprising professionals from several KPMG International member firms.
KPMG is a global network of professional firms providing Audit, Tax and Advisory services. We operate in 146 countries and have 140,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International, a Swiss cooperative. Each KPMG firm is a legally distinct and separate entity and describes itself as such.
KPMG in Hungary employs 575 people - KPMG Hungary Ltd. offers audit services, while KPMG Advisory Ltd. offers advisory services to Hungarian and multinational companies, government bodies and foreign investors.
© 2010 KPMG Advisory Ltd., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.