Global business tax rates are dropping, but Canada's remain high

Corporate tax rates for G8 countries as of January, 2007

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Canada: 36.1
France: 33.3
Germany: 38.4
Italy: 37.3
Japan: 40.7
Russia: 24
Britain: 30
United States: 40

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A related article:

Indirect Taxes Paying For Global Corporate Tax Competition, by Robert Lee,

Competition between countries to attract and keep foreign investment is continuing to drive down corporate tax rates across the world, although governments are clawing back revenues by increasing indirect taxes, which may require companies to shoulder greater compliance and accounting costs.

This is according to KPMG's corporate and indirect tax survey 2007, which, for the first time, tracks both corporate and indirect tax rate trends, shedding light on the way in which overall tax revenue calculations made by governments affect the relationship between tax authorities and business.

KPMG concludes that indirect taxes appear to be playing an increasingly important role in the revenue-gathering strategies of many countries around the world. This is a difficult policy for governments to follow, says the report, because the link between higher indirect taxes and higher prices is obvious to anyone who buys goods and services through higher prices, but the link between lower corporate tax rates and increased inward investment is less well understood. This has major implications for companies, their tax strategies and their accounting systems, the report noted.

Loughlin Hickey, Global Managing Partner of KPMG in the UK, observed that: "There is a clear tendency among nations in competition to attract and keep inward investment, to reduce their corporate tax rates and seek to make up the shortfall with increases in indirect taxes. This is rather than relying solely on growth brought about by corporate investment to expand this tax base. These tactics suggest that as well as attracting new investment, retaining current investments is a success in itself."

Hickey said that this was illustrated by Singapore, where Prime Minister Lee Hsien Loong had announced that a corporate tax cut would have to be paid for by an increase in GST. "If we bring down our corporate tax, every percentage point will cost us $400 million. It is big money," Lee told the Singapore Parliament last year, adding: "Therefore we must consider raising indirect taxes." Prime Minister Lee then went on to announce in his 2007 budget a 2% cut in corporate tax to 18% and a 2% increase in GST to 7%.

Rates of GST, VAT or its equivalent levy vary widely globally. The lowest rate is to be found in Aruba, where it is charged at 3%, the highest rates are to be found in Sweden, Denmark and Norway at 25%. On a regional basis, the average EU VAT rate at 19.5% is higher than the OECD average of 17.7%. The average rate across the Asia Pacific region is 10.8%, and in Latin America the average is 14.2%. However, KPMG says that it is difficult to draw direct comparisons between individual jurisdictions or regions because of the huge amount of special tax regimes and exceptions applied by many countries.

Across the OECD, the average rate of VAT/GST has held steady for the last six years, but the average corporate tax rate has drifted downwards by more than a tenth, from 31.4% to 27.8%. "So without changing rates, VAT/GST type taxes have become steadily more important as sources of revenue," the study noted.

In 2003, the last year for which figures are available, the average contribution of VAT/GST type taxes to government revenues across the OECD rose to 32.1%, having stayed between 31.2% and 31.7% for each of the previous five years. In some OECD countries, for example Mexico and Turkey, VAT/GST already contributed more than 50% to government budgets.

One of the advantages for governments of VAT/GST over corporate tax is that it provides a steady flow of revenues throughout the year rather than widely-spaced lump sums. However, this has major cost implications for companies which, effectively acting as a tax collector, must ensure that their accounting systems are up to date.

On the other hand, the survey shows that corporate tax rates are continuing to fall worldwide, but there are signs that this trend is slowing. Globally, average rates have decreased from 27.2% last year to 26.8% this year - significantly less than the major reductions seen in the late 1990s and early 2000s.

Of the 92 countries which participated in the KPMG survey, 18 reduced corporate tax rates, while two increased them. With such a small drop in average global rates, the report suggests that these adjustments were relatively slight, the major exception being Turkey, which slashed corporate tax by 10% to 20%. There were several significant reductions in the EU, where 17 out of the 27 member states cut rates, the largest being Bulgaria which decreased corporate tax by 5% to 10%. This took the EU average rate to 24%, 1.6% lower than last year. By comparison, the OECD average has fallen by less than 1% to 27.8%. Corporate tax cuts in India, Malaysia, and an increase of 2.5% in Sri Lanka leaves the Asia Pacific average broadly unchanged at 30%. Despite a material reduction of 8% in Aruba and smaller decreases in Columbia and the Dominican Republic, the Latin American average has fallen by just 0.5% to 28%.

"It would be interesting to conclude that corporate tax rates have reached their natural low points," noted Loughlin Hickey, "but it is clear that corporate tax rates in Europe are still being driven down, even as indirect taxes remain high."

However, while significant reductions are in the pipeline in the UK, Germany, Spain, Singapore and China and will be reflected in next year's report, Hickey concluded that: "It looks as if international tax competition has some way to go yet"

Deadline Extended until July 2 for Reporting on Foreign Bank and Financial Accounts

WASHINGTON — Taxpayers have an additional two days this year, until July 2, 2007, to file the Report of Foreign Bank and Financial Accounts (FBAR), Form TD F 90-22.1, the Internal Revenue Service announced today.

The deadline for FBAR forms is June 30, 2007. But because June 30 falls on a Saturday, the IRS is allowing taxpayers to file by July 2.

FBAR information returns for the 2006 calendar year must be filed with the U.S. Department of Treasury, P.O. Box 32621, Detroit, Mich., 48232-0621. The address for commercial delivery is: U.S. Department of Treasury, Currency Transaction Reporting, 985 Michigan Avenue, Detroit, Mich., 48226.

The FBAR form is not available for electronic filing, but many income tax software packages can prepare a printed copy. FBAR forms and instructions are also available on this Web site or FinCEN Web site and from the IRS via telephone at 1-800-829-3676.

The FBAR form is required for each U.S. person who has a financial interest in, or signature authority, or other authority, over any financial accounts, including bank, securities or other types of financial accounts, in a foreign country, if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year.

Taxpayers who need assistance completing Form TD F 90-22.1 can contact the IRS by telephone at 1-800-800-2877, option 2, or via email at FBARquestions@irs.gov.

How Canadians pay their taxes

Ottawa, Ontario, June 22, 2007... Canada Revenue Agency (CRA) announced today, that to date, it has received over 18.3 million payments. The vast majority of Canadians prefer to pay their taxes through their financial institutions, electronic banking, or by cheque. Cash payments continue to decline and make up only 0.3% of all payments.

Canadians have many options to choose from when they make a payment to the CRA. They can use telephone and Internet banking service, preauthorized debit, send payments by mail to CRA Tax Centres, or pay by cheque, money order or debit card at CRA payment counters. They can also make their payments in cash, free of charge, at financial institutions across Canada.

Total number of payments received as of June 15, 2007

Payment Method	2007	2006	Change
Cheque	8,399,499	8,071,721	4.06%
Financial institution	5,921,409	5,770,122	2.62%
Electronic Banking	3,666,037	3,009,212	21.83%
Pre-Authorized Debit	237,500	241,652	-1.72%
Interdepartmental Settlements	78,046	89,138	-12.44%
Cash	51,259	63,073	-18.73%
Debit Card	40,976	43,469	-5.74%
Total	18,394,726	17,288,387	6.40%

Cross-Border Taxation of Stock Options

Most large U.S. corporations have subsidiaries or other, operations in Canada, and many of these firms routinely send domestic employees to work temporarily in Canada. At the same time, many large U.S. firms offer stock options to their employees. Because of the differences in the way Canada and the U.S. tax stock options, expatriate employees are at risk of double taxation. For example, if an individual receives an option while employed by a Canadian firm and is treated as a Canadian resident for tax purposes, Canada often considers the option to be derived from employment with the Canadian firm, regardless of whether the option is vested. Therefore, a U.S. individual receiving Canadian options may move back to the U.S. prior to vesting in those options, yet Canada will treat income from the subsequent exercise of the options as Canadian-source income, subject to Canadian individual income tax (and perhaps social security tax).

Meanwhile, the U.S. will tax the full amount of income realized on exercise of the option and provide a foreign tax credit for income taxes paid to Canada. However, the U.S. will probably treat only a portion of the income from the exercise of the options as foreign-source; specifically, the U.S. will probably apportion the income between Canadian- and U.S.-source in proportion to the time worked in each country during the vesting period. This may result in double taxation.

In addition, the U.S. will impose FICA tax on the gain realized. Presumably, the U.S.-Canada Totalization Agreement could be invoked with respect to FICA tax and Canadian social security tax, but the employee may not have a certificate of coverage at the exercise date, or the certificate may have expired.

By Thomas, Jim Publication: The Tax Adviser

For employee stock options tax questions, please consult a professional accountant who are specialized in cross-border taxation to avoid double taxation and unexpected tax withholdings.

Canadian Self-Employed Tax Filing Deadline

Self-employed individuals and their spouses or common-law partners, have until midnight local time, on June 15, 2007 to file their 2006 income tax returns. For Efiles, for records that are returned for correction, you will have until midnight local time on June 21 to correct and retransmit electronically. Records that are retransmitted and accepted on or before June 21 will be considered as filed on time.

BC Tax Cut - Balanced Budget 2007 is dedicated to housing.

From BC 2007 budget:

10 per cent personal income tax reduction for individuals earning up to $100,000.

Taxable Income	B.C. tax after 2007 tax cuts	Reduction in B.C. tax
$15,000	$0	$56
$20,000	$256	$567
$30,000	$1,023	$583
$40,000	$1,679	$906
$50,000	$2,484	$1,276
$60,000	$3,299	$1,651
$70,000	$4,142	$2,055
$80,000	$5,210	$2,678
$100,000	$7,766	$3,903
$120,000	$10,706	$4,903
$150,000	$15,116	$6,403

With the great vancouver's benchmark single family home pricing at $700k, I am wondering how much difference this tax cut will improve the housing affordability?

CRA Steps Up International Tax Audits

From KPMG report:

A recent report of the Auditor General (AG) indicates that the CRA has become increasingly concerned with the tax risks associated with international transactions. Although the AG found that the CRA is better able to identify potential non-compliance with the tax rules on international transactions, the CRA still needs to improve in several areas.

Given the CRA’s increased focus on international tax issues, including transfer pricing, Canadian corporations that undertake transactions with related parties in foreign jurisdictions face an ever-increasing probability of a transfer pricing audit by the CRA.

Consequently, corporations should be diligent in developing and implementing transfer pricing policies, as well as preparing appropriate transfer pricing documentation in an effort to reduce the likelihood of a transfer pricing adjustment in the event of a CRA audit.

CRA’s focus on international taxation issues

Aggressive tax planning, which includes international tax compliance, has been one of the CRA’s top four compliance priorities since 2004. As noted in the 2007 AG report, the CRA estimates that over 16,000 Canadian corporate taxpayers report some type of foreign transaction with related parties. These related-party transactions are estimated to involve more than $1.5 trillion in 2005.

The 2005 federal budget allocated $30 million annually to the CRA to address aggressive international tax planning. The CRA is using these funds to research tax avoidance and to increase the number of international auditors and tax avoidance auditors. As of March 31, 2006, the CRA had 320 international auditors and researchers and 210 non-resident auditors and program officers.

Auditors now use checklists and other planning tools to help them determine whether a corporation may be non-compliant and to begin transfer pricing and foreign affiliate audits. In addition, the time budgeted for an international audit of a large corporation has increased significantly. In 2006, the CRA’s total international audit reassessments had increased to $941 million from $778 million in 2001. The additional tax assessed on international transactions by large corporations was $729 million, compared to $300 million in 2001.

International auditor expertise and support

In its 2002 report, the AG expressed concern about the lack of adequately trained and experienced international auditors who were available to undertake transfer pricing and foreign affiliate audits.

A lack of adequate international audit experience was still observed by the AG in 2006. For example, in two Greater Toronto Area (GTA) tax services offices (TSOs), more than 40 percent of auditors had less than two years of international audit experience, while four of the ten international audit team leaders had less than one year of international team leader experience.
In an attempt to combat the lack of international audit experience, the CRA added 140 international and avoidance auditors and 39 experienced auditors to perform research studies. In addition, since 2002, the agency increased the total number of economists it employs to 16. However, the 2007 AG report notes that some TSOs continue to lack adequate training and experience in international audits, especially in the GTA.

The 2007 AG report noted that only 25% of audit recoveries came from the GTA, where more than 40% of large corporations report non-arm’s length transactions. It is suspected that tax recoveries in the GTA have been lost due to inconsistencies in the approach and coverage of international audits. The 2007 AG report also noted that, even though economists have been involved from the onset of the audit, they have limited experience in transfer pricing audits and lack industry-specific expertise.

Foreign documentation requests

The 2007 AG report revealed that the CRA has increased the use of information requests from foreign jurisdictions. However, the report concluded that auditors are still not making sufficient use of these provisions where taxpayers failed to provide the information voluntarily.