According to the latest KPMG International Individual Income Tax and Social Security Rate Survey, last year saw more than twice as many rate changes than this year and four G-20 members reported updates. In 2011, Spain is the only economy (defined by GDP) within the world’s top 20 economies surveyed that had a change in its top personal income tax rate.
“Though there has been much debate about personal tax rates in 2011 as many economies continue to address debt concerns and walk a tightrope between further recovery and downturn, these discussions have not translated into a lot of rate changes – particularly in the larger economies,” says Madalina Racovitan, Partner in KPMG in Romania’s Tax Department, and Head of People Services.
Changes Mostly Seen in Europe
Although there are some significant differences among the sub-regions, the vast majority of rate movement in 2011 comes from the Europe region.
The average rate for Eastern Europe at just over 17 percent is less than half of that of other European sub-regions. This is a result of the historical low flat tax initiatives. In 2011, this distinction between Western and Eastern Europe was further deepened as Hungary slashed their top personal tax rate from 32 to 16 percent and adopting a flat tax rate system.
As Racovitan points out: “Romania has maintained its flat 16% rate for personal income tax. One particularly welcome development since last year’s survey, and which KPMG and the wider business community in Romania had been advocating for some time, has been the reintroduction of the cap for pension insurance contributions at five times the average salary. This has given Romania a better position than last year in the global league table of effective employer and employee social security rates for top earners. This is a useful incentive to attract talented top managers to Romania. Nevertheless, social security still represents a significant burden for employers, particularly bearing in mind that the benefits are limited.”
Western Europe, where the average rate is over 45 percent, continues to have the highest personal tax rates of any sub-region globally. Within the Western European sub-region, an attractive personal tax rate environment remains effectively limited to certain cantonal pockets within Switzerland. Luxembourg is the only country in Western Europe which had a rate change in 2011. Under pressure to reduce its budget deficit, Luxembourg responded by increasing the top personal income tax rate, raising the unemployment surcharge for high income earners and introducing a crisis contribution tax. When combined, these measures have effectively increased the top personal tax rates by approximately 3 percent.
Social Security Implications
KPMG International’s analysis comparing both effective income tax and social security rates on USD100,000 and USD300,000 of gross income emphasizes the point that other taxes and the impact of deductions clearly need to be considered.
“Whether social security is a true tax may be debated, but in terms of cost, it can be material,” says Racovitan . “Therefore in our survey we include a review of both the employee and employer contributions. Social security components can vary significantly including by country, employer and employee type.”
Effective rates are derived by taking total taxes over gross income prior to any deductions (which may include social security) to allow for better comparison as deductions can vary greatly across countries. Using a USD100,000 basis for example, Belgium, Croatia and Greece all have significantly higher combined effective personal income tax and employee social security rates ranging from over 43 percent up to almost 48 percent. The primary difference is social security. As Daniela Oprescu, Director in KPMG in Romania’s International Executive Services team adds “Romania ranks relatively well in the table for combined income tax/employee social contributions, taking 55th place out of 88 countries for effective rates on $100000 of gross income and 64th place for rates on $300000. However, this does not tell the whole story, because Romania scores much worse when employer’s social contributions are taken into account.”
While restricting the review to recognized core contribution requirements for employees earning annual gross income of USD100,000 and USD300,000, the results show France has the highest combined employee and employer social security rate at over 50 percent under either scenario. Belgium is the next highest at 48 percent.
As Oprescu adds: “Although the reintroduction of the cap on social contributions has been a welcome development, Romania nevertheless still ranks among the countries with the highest level of combined employer/employee social contributions for top earners, taking 18th place out of 87 countries surveyed for effective employer and employee social security rates on $100000 of gross income. In this league table, Romania is higher than many developed European countries, such as Norway (29th place), Spain (30th) and the United Kingdom (35th). Given the limited benefits which the Romanian social security system provides in comparison to these countries, this gives cause for concern. In the table for combined employer/employee social security rates on $300000 of gross income, Romania takes 24th place out of 85 countries surveyed, again ranking higher than many developed economies such as the United Kingdom (26th), Germany (44th) and the Netherlands (50th).”
Oprescu notes, “While these rates may seem exceptionally high, over one-third of the countries within our review had combined employer and employee social security-based effective tax rates of above 20 percent on USD100,000 of gross income. With current and future increased demands on the social security infrastructures of many countries from around the world, we can expect further stress on many already fragile systems. Given aging populations in many countries and that many economies are still dealing with uncertainty, the social support schemes are as important now as ever.”
As Racovitan adds: “What these league tables do not show is that in Romania, those on low incomes suffer a particularly high effective tax rate, especially when comparing with other countries. Romania is not unique in this respect. There is a heated debate in Britain about the 50% tax rate for top earners, while neglecting the more pressing issue of marginal tax rates of over 50% for many middle to low income earners, hit by income tax, National Insurance contributions and withdrawal of certain incentives. I would encourage the Romanian government to continue the policy of reducing rates and introducing caps on all types of social security contributions at a reasonable level (including health insurance and unemployment insurance contributions). This would be likely to improve compliance and on the long run, generate more revenue for the various social security budgets ”
KPMG’s Individual Income Tax and Social Security Rate Survey 2011 is a cross-border survey of personal tax and social security rates with historical data from 2003-2011. The report covers 96 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.