VAT replacing company tax?

Sun 31st Jan 2016

Is VAT helping to kill off Corporate Income Tax (CIT)?

The business news headlines continue to be dominated by the challenges of governments attempting to capture a fair share of tax revenues from multinational companies. International bodies, such as the Organisation for Economic Development (OECD) and European Union (EU), appear to be issuing new proposals and rules by the week to help countries co-ordinate this objective.

But is it a losing battle trying to prop up CIT, an invention of the 19th century?  Is CIT no longer fit for purpose?  Global companies find it too easy to move profits to low-tax jurisdictions, or create complex corporate structures to reduce their taxable profits.  This denies countries their valuable tax revenues, and places a heavier fiscal burden on smaller, domestic companies.

Corporation Tax share of GDP down 22% in 7 years

Governments already seem to agree that CIT is no longer the best source of revenues. A steady rise in global VAT rates, levied on consumers, and a widening of the tax base has been underway for some time. This has been accelerated by a race to the bottom on CIT rates as governments aim to attract technology, pharmaceutical and other high value, job-creating industries.

To replace the lost CIT revenues, VAT is on the rise. The chart below, based on OECD data, shows the comparative international fall and rise in CIT and VAT revenues, respectively.  CIT collected as a % of GDP has fallen by over 22% in just seven years.  By contrast, VAT’s share has risen by 4% over the same period.

VAT Company Tax