The Higher the Corporation Tax, the Poorer the Region

Dec 19 , 2020
By Lucy Desai

While corporation tax rates are influenced by a country’s policies, there is clearly a pattern with developing countries and emerging economies paying higher rates to sustain the country.

Some of the wealthiest countries in the world’s corporation tax are relatively varied, with Luxemburg standing at 27.08pc, Norway at 22pc, Iceland at 20pc, Switzerland at 18pc and Ireland at 12.5pc. It would appear that some countries’ cultures factor into how much tax they pay.

For instance, Scandinavian countries are proud to pay higher taxes to contribute to social welfare. In fact, Norway, Denmark and Iceland, the top three happiest countries, are all among the highest taxed countries in the Organisation for Economic Cooperation & Development (OECD). This is in terms of total tax revenue as a percentage of gross domestic product (GDP).

On average, Africa has the highest corporation tax rate throughout the world’s continents at 28.45pc and South America, the second highest with an average rate of 27.63pc. However, Europe stands at the lowest rate of 20.27pc.

Does this contradict the claim that developed countries pay higher tax?

Corporation tax plays a key part in government revenue, according to the OECD. This is particularly true in developing countries, despite the global trend of falling rates since the 1980s. This is not true of two continents, South America and Africa, which pay the highest corporation tax rates in the world.

South America has the most countries in the top 10 with the highest corporate taxes. Brazil and Venezuela have the most formidable, at 34pc, followed closely by Colombia at 33pc, and Argentina at 30pc. This makes South America the continent with the most countries in the top 10 that pay the highest corporation tax.

It is unclear whether South America, as an emerging continent, is charging higher taxes to raise government revenue or to benefit from businesses that are looking to expand internationally and enter new markets. But it is true that the continent is becoming a popular choice for business to enter, with strong trade links and an advantageous geographic location. Indeed, South America is a large continent where some countries are business-friendly, and others are harder to penetrate.

Africa leads the world as the continent with the highest average corporation tax. Being the poorest region in the world, Africa has the highest average corporation tax at 28.45pc, with the highest being that of Zambia’s at 35pc. The lowest is that of Libya and Madagascar at 20pc. South Africa stands roughly in the middle at 28pc, slightly above average for Africa overall.

Let us take the South African case a little further. It is one of Africa’s largest economies, among the 54 diverse countries, in terms of political stability, development, growth and population. South Africa has nonetheless been a relatively slow growth nation. It was one of the reasons that its government dropped corporation tax from 34.55pc in 2012 to the current rate.

Was this effective?

It is hard to say. GDP in South Africa has fluctuated quite dramatically since the 1960s. Business favours countries with political stability, which is something South Africa does not currently have.

Between 1996 to 2019, the Political Stability and Absence of Violence/Terrorism index by the World Bank rated South Africa at an average of -0.15 points. The latest value from 2019 is -0.22 points. For comparison, the world average in 2019 based on 195 countries is -0.05 points.

It is thus hard to say that any single factor influenced the trajectory of growth of the country, but it is indicated that the country’s GDP growth rate has not changed in any significant way since the corporate tax rate was lowered.

PUBLISHED ON Dec 19,2020 [ VOL 21 , NO 1077]

a content writer at QuickBooks, a global company offering the world's leading accountancy software.

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