There's (almost) no place like home when it comes to competitive tax rates. So says a new KPMG study ranking Canada as having the second-lowest tax burden for businesses among 14 major countries.
Only India was ranked as more tax competitive than Canada, and Canada came out on top among the 10 major developed countries measured. The KPMG study, done every two years, measured a complete roster of corporate income taxes, capital taxes, sales taxes, property taxes, miscellaneous local business taxes and statutory labour costs as they apply to large businesses, particularly those that are foreign-owned. KPMG looked beyond nominal rates to calculate the actual taxes owing by taking into consideration typical business deductions.
"The study is based entirely on effective tax rates," says Elio Luongo, Canadian managing partner, tax at KPMG LLP in Toronto. The audit, tax and advisory firm took into account the generally available tax credits or deductions for each jurisdiction. Although the study compared effective tax rates for businesses among the 14 countries, it didn't analyze the pattern specifically for SMEs.
The study assigned a Total Tax Index (TTI) to each location, comparing the business-tax burden in each country against a benchmark of 100 for the U.S. As in golf, the lower the score the better.
For the first time, this study included four major high-growth countries: Brazil, India, China and Russia. Canada (59.1) ranked just behind India (49.7) in tax competitiveness, followed by China (59.7) and Mexico (63.6), with Russia (71.7) at the fifth-lowest rate. Among developed nations, the U.K. (73.3) ranked second behind Canada, followed by the Netherlands (77.2), the U.S. (100), Germany (122), Australia (125.1) and Japan (152.3). Canada's score is 4.9 points lower now than it was in 2010—a significant improvement.
The study also compared tax burdens in specific cities. Among the 55 cities with populations of more than two million that KPMG studied, Vancouver (49.2), Toronto (56.0) and Montreal (62.1) all ranked in the top 10. In comparison, the biggest U.S. city, New York (101.3), was in 38th place.
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The study noted that tax rates vary widely from industry to industry. Labour costs, for example, likely make up a higher share of total costs for service-sector companies than those in other sectors. For these companies, therefore, statutory labour costs—such as taxes and other charges on payroll to cover social security, medical care, employment insurance and workers' compensation—are more of an issue. Manufacturers are typically more capital intensive, so capital taxes, property taxes and the availability of tax incentives for manufacturing are more important considerations in their location decisions.
The lower tax rates facing Canadian companies may help firms based here to compete on the global stage despite the country's higher costs for labour, transportation and real estate, as well as the strong loonie. And because tax costs are likely to range more widely among countries than other costs, says Luongo, lower rates can be the deciding factor when businesses decide where to locate.