CBT Corporate tax ranking

The UK coalition government aims “to create the most competitive corporate tax regime in the G20, while protecting manufacturing industries.” In a 2011 report, we assessed how close the government was to achieving its objective. Updating our research to 2012 indicates that the UK’s rankings with respect to the G20 have changed little, despite a reduction in the corporation tax rate of 2 percentage points. This is partly because other countries have also reduced their rates, but also because the reduction in the UK rate has not yet been very large.

Our 2012 report also compares the UK with other OECD countries. The results of this comparison show the UK in a less flattering light. The UK ranks 22nd out of 33 OECD countries for a measure of the effective average tax rate (EATR), and 31st out of 33 for a measure of the effective marginal tax rate (EMTR). These poor rankings are mostly due to the lack of generosity of allowances for capital expenditure: amongst the 33 OECD countries, only Chile has less generous allowances. But in addition the UK’s tax rate is relatively high when compared to OECD countries. The UK’s tax rate of 26% at the beginning of 2012 was only the 17th lowest rate in the OECD.

This report also documents reforms that have been enacted and proposed in G20 and OECD countries in 2011, 2012 and up to 2015. Taking into account such reforms indicates that even after the implementation of the planned cuts to corporation tax, the UK will not be particularly competitive relative to other countries in the G20 and OECD.

The economic and financial crisis may have given renewed impetus to competitive pressures between countries to reduce effective rates of corporation tax. Comparing the spate of recent reforms to similar reforms over the last thirty years, we find that the number and size of recent reforms is consistent with earlier periods. Rates of corporation tax have been declining for 30 years, and this decline is continuing. However, there is some evidence of a greater response to competitive pressures amongst G7 countries.

The UK government has stated that it aims to ‘create the most competitive corporate tax regime in the G20’. This report assesses the current competitiveness of the UK corporate tax system relative to other G20 countries. Our key findings for 2011 are that the UK has an effective average tax rate (EATR) of just over 26 percent, which ranks the UK 9th of out the 19 independent G20 countries (excluding the European Union), and the UK has an effective marginal tax rate (EMTR) of just under 23 percent, which ranks the UK 15th out of the 19 countries. The weaker position of the EMTR is due to the fact that, although the UK tax rate is relatively low by international standards (in 7th position), the UK is the least generous G20 country with respect to allowances for capital investment. Recent tax reforms that have reduced allowances have tended to raise the EMTR, despite corresponding cuts in the tax rate. The tax reforms proposed by the government to take place between 2011 and 2014 will improve the competitiveness of the UK tax system, if the other countries do not change their tax systems. In this case, the UK would rise to 5th in the EATR ranking, and 14th in the EMTR ranking.