Business taxation shifting from profit to labor taxes

Corporate income taxes have fallen faster than labor taxes over the past nine years amid lower total tax rates, according to a study by the World Bank and PwC.

The Paying Taxes 2014 report shows that labor taxes borne by businesses have been more stable than corporate income taxes and as a result now represent the largest component of the total tax obligations.

The study, which took into account the different mandatory taxes and contributions that a medium-sized firm must pay in a given year, found that total tax rates worldwide declined since 2004, but noted the rate of decline has slowed in 2012.

Until 2008 seven of the eight geographical regions had consistently recorded a fall in their average total tax rate. In 2009 five regions noted a decline and in 2011 only three regions saw tax rates drop.

In 2012, the picture has become more mixed with 38 economies implementing measures to reduce tax rates and an equal 38 countries raising tax levels, in particular to address public sector deficits and fund public sector projects.

Of the various business tax types, labor taxes declined less than profit taxes and other taxes. The report said the findings suggest policymakers followed the results of several OECD studies, which indicated that corporate income tax is the least growth-friendly type of tax followed by labor taxes.

“Reforming the tax system is essential and this study shows that it is not just corporate income tax that is important. It is also a case of making decisions around who needs to be taxed, how they will be taxed, and by how much,” said Andrew Packman, leader for Tax Transparency and Total Tax Contribution at PwC.

“Trends in the international tax environment such as the globalization of business, increasing competition among countries for tax revenues, and the increasing proportion of company assets that are made up of intangibles such as brand names, software and know-how, require tax systems around the world to be updated to meet modern needs,” he said.

Although the global trend shows a general shift toward labor taxes for businesses from profit taxes, regional tax system continue to vary widely. In Africa and South America, other taxes are the largest component of overall total tax rates, whereas in Asia Pacific, North America, Central America and the Caribbean profit taxes dominate.

In Europe and Central Asia labor-related business taxes traditionally are the largest component of the tax system.

The report measured taxes and contributions borne by medium-sized businesses, including profit or corporate income tax, social contributions and labor taxes paid by the employer, property taxes, property transfer taxes, dividend tax, capital gains tax, financial transactions tax, waste collection taxes, vehicle and road taxes and other small taxes or fees.