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 the survey has been produced.
“In large part, this upward trend in personal tax rates is the result of a lack of economic recovery and increasing debt concerns,” shows the report. “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.
KPMG notes, “Further increases may be on the horizon, with incoming President François Hollande considering the introduction of a 75 percent tax rate band for taxpayers earning over EUR1,000,000.”
Spain’s complimentary tax, which was introduced in January 2012, 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 EUR 300,000 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 Ukraine are notable for being the only two Eastern European countries of those surveyed to maintain a progressive tax band structure.
As Madalina Racovitan, Partner in KPMG in Romania’s Tax Department, and Head of International Executive Services comments: “Romania has maintained its relatively low 16% flat tax on personal income, which makes the income tax burden less for higher earners than in most Western European countries. Although there has recently been some debate among politicians about the flat tax, with some advocating a return to a progressive system, we have so far not seen any suggestion of a significant increase in the tax on high incomes, similar to that proposed in France.”
As Racovitan continues: “The KPMG survey also shows that for those with gross annual income of $100000 or $300000, Romania continues to be relatively competitive in terms of income tax combined with employees’ social contributions. However, a perhaps truer picture of the cost of employment in Romania is given by also taking into account employer’s social contributions, and here Romania performs quite poorly. Given the limited benefits deriving from the Romanian social security system compared with these countries, the high rates give even more cause for concern, and could act as a deterrent to Romanian companies hiring top managers, whose experience might enhance economic growth. A further difficulty in Romania is that low and middle income earners suffer a disproportionate tax and social security burden because these are paid on the entire income from zero, whereas in many developed countries, there is a low income threshold below which no tax or contributions are payable.”
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. 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.
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), the Netherlands (55 percent rate), Austria (50 percent rate), Belgium (50 percent rate) and the United Kingdom (50 percent rate). There are exceptions to this from Asia and Africa, specifically Japan (50 percent rate), and new survey participant Senegal (50 percent rate).
KPMG’s Individual Income Tax and Social Security Rate Survey is a cross-border survey of personal tax and social security rates with historic 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. A copy of the survey is available at: www.kpmg.com/tax or visit our online tax rate tool at: www.kpmg.com/taxrates for easy corporate, indirect and individual income tax rate comparisons and analysis.