Effective Corporate Tax Rates in the C&AG Report–Countries

The Office of the Comptroller and Auditor General has published its Report on the Accounts of the Public Services 2016 which includes a chapter on Corporation Tax Receipts.  One issue which the chapter addresses is effective rates of Corporation Tax.  For a variety of reasons this is rarely straightforward.  Here is a chart included by the C&AG

The chart is an effort to compare effective rates with statutory rates.  The statutory rates are taken from the OECD with the effective rates taken from the Paying Taxes 2017 report from pwc.  Two paragraphs are provided as commentary to the chart:

20.22 In 2015, Ireland had the lowest statutory rate of corporation tax of all OECD countries.1 Based on the PwC/World Bank report, Ireland’s estimated effective rate of corporation tax was 12.4%, which was just 0.1% below the statutory rate. 12 OECD countries had an effective rate of corporation tax which was lower than this; one had a rate which was equal; and 21 had an effective rate which was higher.

20.23 In 2015, the United States had the highest statutory rate of corporation tax in the OECD at 39%, coupled with the second highest effective rate of 28.1%. France had the second highest statutory rate at 38% but the lowest effective rate at just 0.4%. The OECD reported that for 2015, France’s corporation tax as a percentage of total taxation was 4.6%.

The French example should give pause for thought. Could they really have an effective corporate income tax rate of 0.4 per cent?  Well in the case of the model company used in the pwc report it would seem so but that is hardly representative of the French tax system.  And it is not clear what the final sentence is supposed to add.  The proportion of total tax in France that is raised from Corporation Tax tells us nothing about the effective rate.

Of course, what the chart is trying to address is a legitimate question: how do effective rate for corporate income tax compare across countries?  The advantage of the pwc report is that it allows such cross-country comparisons but highlighting the outcome for France shows the approach used may not give the best insights in all cases.

We can try to do something similar with Eurostat national accounts data though it gives a smaller sample size.  The following table gives taxes on income paid as a proportion of net operating surplus for the non-financial corporate sectors of the EU28, where available.  (Click to enlarge).

The averages provided are unweighted, arithmetical averages and for the ten years shown an overall average of 18.8 per cent results.  Ireland comes in at 10.4 per cent with France showing a much more plausible result of just over 30 per cent.  Three countries have a lower average than Ireland for the period shown, Estonia, Latvia and Lithuania.

For what it is worth, the reason for the high rate for Cyprus (44.7 per cent) is the inclusion in D51 of items that would not necessarily be considered a profits tax such a defence contributions based on dividends and taxes collected from offshore companies.  What would typically be considered Corporation Tax makes up around 30 per cent of the amounts included under D51 for Cyprus which would bring to effective rate rate close to the headline rate which is similar to Ireland’s. 

Maybe this just highlights the difficulty in making such comparisons but looking at aggregates is likely to give a better reflection of what is going on in general than using a hypothetical individual example.

What do we conclude? Ireland has an “effective rate” that averages just over ten per cent.  This is low by EU standards but, of course, that is deliberately so.  No country in the EU has an effective rate of 0.4 per cent.