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Personal income tax rates on the rise in 2012 

08 November 2012
Average individual tax rates are on the rise globally, with increases largely in support of specific economic or social objectives. This is according to the latest KPMG International Individual Income Tax and Social Security Rate Survey 2012.

The global average top personal income tax rate has increased by 0.3 percent, and this is only the third time that an increase has been observed over the past ten years since the beginning of the survey.

In Asia, there are indications that rates in Japan are set to change with permanent residents of Japan soon becoming subject to a Special Reconstruction Surtax. Planned to start next year, the intention is to help fund the rebuild in the aftermath of the Great East Japan Earthquake.

South Korea has also introduced an additional tax band with a three percent increase in an effort to target high earners as a source of additional revenue.

Mr BJ Ooi, Partner, Head, International Executive Services with KPMG in Singapore said: “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 increases pointed out in the survey are seen in Europe.

In France, reforms are seeing the introduction of two new tax rate bands for high income earners. This 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.

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.

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.

Some changes has been noted in Africa, with Egypt introducing a new 25 percent tax band to target super high income earners. Zimbabwe has also increased 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.

While there were no changes to top federal rates in the United States in 2012, the Bush Tax Cuts are scheduled to expire at year’s end. If the expiration remains on schedule, the top US Federal tax rate would increase from 35 percent to 39.6 percent in 2013.

Top tier rates largely constant in Asia
Rates remained otherwise constant among the Asian heavyweights China, Japan and India. They have not altered their top rate of tax in the last ten years. Hong Kong and Singapore continue to offer very attractive personal income tax rates. Within South-East and East-Asia, Singapore’s tax rate remains among the lowest, along with Hong Kong and Macau in 2012 (page 22, also included in Appendix 1).

Mr Ooi said: “Given the slower pace in economic recovery and increasing global debt concerns, Singapore is still keeping to having one of the most competitive rates in the region. Effects of this will send signals to businesses, entrepreneurs and talents that we are still one of the choice locations for them to settle down in.”

The highest rate of individual tax in Singapore has also stayed static at 20 percent for the last five years. The taxable income level at which the highest individual tax rate kicks in is at SGD 320,000 or about US$258,000.

For many multinational companies that wish to locate their senior staff here, two competing locations, Hong Kong and Singapore, are usually considered. Based on KPMG’s computations of tax burdens of executives with different levels of compensation, Hong Kong comes in with a lower tax burden than Singapore where earnings exceeding about US$500,000 are concerned.

In Singapore, at an income level of US$100,000 (page 8-9), the effective income tax rate is 6.3 percent with a further 13.9 percent going towards the CPF. In Hong Kong, this is 12.6 percent going towards income tax. At an income level of US$300,000, 14.1 percent will go towards income tax and a further 4.4 percent will go towards CPF. In Hong Kong, the effective income tax rate is 15 percent.

Europe still has the highest personal tax rates
Elsewhere in Europe, there was 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 East 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. Aside from the changes in Spain, rates in Southern Europe have remained relatively stable at an average of 31.7 percent.

Africa, Latin America, North America – changes seen
Overall, Latin America has also kept top rates constant during 2012, though Mexico is scheduled to decrease its top rate from 30 to 29 percent next year and to 28 percent in 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,” said Mr Ooi,“Just as influential, are what other taxes may apply and on which income thresholds those rates are charged.”