The 2015 International Tax Competitiveness Index (ITCI) released by the Tax Foundation in Washington, DC, places Estonia as the country with the most competitive tax code out of the 34 assessed, followed by New Zealand, Switzerland, Sweden and the Netherlands. The bottom placed country was France, with Italy second from bottom, followed by the US, Portugal and Poland.
Estonia is first because its tax code offers a 20% tax rate on corporate income that is only applied to distributed profits, a flat 20% tax on individual income that does not apply to personal dividend income, a property tax that applies only to land values, and a territorial tax system that exempts 100% of the foreign profits earned by domestic corporations from domestic taxation – with few restrictions.
The ITCI finds that many countries have been working hard to improve tax codes. New Zealand, for one, cut its top marginal individual income tax rate from 38% to 33%, shifted to a greater reliance on the goods and services tax, and cut its corporate tax rate to 28% from 30%.
While countries such as Iceland (which ranked 20th), Portugal (31st), Japan (25th) and the UK (11th) improved their ITCI ranking on 2014's list (the UK improved its ranking from 13th to 11th based on a cut in its corporate income tax rate from 21% to 20%), the US, in 32nd place, remained stagnant. This was attributed to the US being one of the six remaining OECD countries that does not have a territorial tax system. It also maintains the highest corporate income tax rate in the industrialised world at 39%, and it has a relatively high and poorly structured individual income tax system that taxes both dividends and capital gains.
“The US has not had a major change to its tax code since the Tax Reform Act of 1986 when the US Congress reduced the top marginal corporate income tax rate from 46% to 34% in an attempt to make US corporations more competitive domestically and overseas,” says the ITCI.
By comparison, most other OECD member countries have reduced their average corporate tax rate from 47.5% in the early 1980s to about 25% today.