New Research Reinforces the Need for Major Tax Reform

Urgent reform is needed to avoid Australia’s corporate tax burden climbing to levels not seen since business taxes were cut following the Ralph Review in 1999, a new BCA report says.

The BCA’s Corporate Taxation: An International Comparison – 2006 Update compares the overall burden of taxes on Australian companies with taxes in competitor countries, such as our trading partners, the OECD and the European Union.

The report, prepared in conjunction with KPMG, found Australia’s corporate tax burden has risen to 5.7 per cent of GDP, up from 5.1 per cent a year ago, more than double that of the United States and almost double the level in the United Kingdom.

“Australia must act now to reform our taxation system or we will jeopardise our economic prosperity and fall even further behind our international competitors,” BCA CEO Katie Lahey said.

“This latest report shows that unless reform action is taken Australian companies could soon be paying a tax burden in line with pre-Ralph Review times of above 6 per cent of GDP.

“It is a sobering thought to think that the slide in our competitiveness has been so acute that the benefits of one of the biggest changes to corporate taxation, the Ralph reforms, have been almost dissipated.

“Looking back over the past seven years it is now clear the Ralph reforms were not bold enough and need to be regularly updated.

“As our report shows Australia cannot afford to keep playing catch up with the rest of the world. We need an ongoing, comprehensive reform strategy so we can stay ahead in the race for international taxation competitiveness.

“The Warburton–Hendy Review was tasked with gathering the information that would help inform discussion about Australia’s tax system. The BCA believes we should not let that work go to waste and the time for that discussion is now,” Ms Lahey said.

While Australia’s headline corporate tax rate of 30 per cent is often cited as a key indicator of international competitiveness, the report shows the total tax burden on companies is more important as it reflects the true level of income taxes paid by companies.

In the 12 months since the publication of the BCA’s first corporate tax comparison there have been substantial and far-reaching changes to personal income tax and superannuation but limited business tax changes.

The report shows the relative competitiveness of many overseas corporate tax systems has improved in the past 12 months, but Australia’s competitiveness has continued to worsen.

Even comparing the headline corporate rate with other countries, Australia’s corporate tax competitiveness has continued to slip.

In the past 12 months Australia’s corporate tax rate has remained at 30 per cent, while in the same period there have been falls in the average rates in the OECD from 29.1 per cent to 28.4 per cent, 25.3 to 24.8 in the European Union and 30.4 to 30.1 in the Asia–Pacific region.

While Australia’s corporate tax burden has risen to 5.7 per cent, in the past 12 months there has been no change in the average corporate tax burden of the OECD (3.4 per cent), while the average tax burden of the European Union declined slightly to 3 per cent. 

Australia’s corporate tax burden is now around double that of the United States and United Kingdom, and around a third higher than our key regional trading partners Japan, Singapore, China and Malaysia.

Disregarding Norway and Luxembourg due to features particular to those economies, Australia’s corporate tax burden is the highest on every relevant global comparison and our relative position is worsening.

Further underlining concerns about our declining international competitiveness, the report highlights that in 1990 Australia held 4.1 per cent of the world’s stock of inward foreign direct investment, but by 2000 this share had decreased to 1.92 per cent.

Despite the Ralph Review changes to corporate tax rates, by 2005 Australia’s share of the stock of global inward foreign direct investment still stood at only 2.08 per cent.

“The BCA’s call for a comprehensive review of business taxes is not intended to ignore the benefits achieved by past reforms. However, it is clear from our research that Australia is being left behind by changes in the international corporate tax environment,” Ms Lahey said.

“Reform, by definition, is about improvement. Piecemeal changes and tinkering with the taxation system are not enough to ensure the five principles of competitiveness, adequacy, simplicity, engagement or efficiency.

“This report is the latest highlighting the BCA’s concern that Australia has no long-term vision for its business tax system and is focused only on the immediate pressures and opportunities associated with each annual budget.

“At a time when governments around the world are reviewing their tax structures to improve competitiveness, the need for a long-term tax reform strategy is now one of Australia’s most pressing economic challenges.

“The BCA considers that a deeper understanding of the tax burden borne by Australian companies and the impact it has on our international competitiveness will demonstrate the need for a more ambitious business tax reform agenda.

“We must take the necessary steps now to ensure we have a strong and vibrant business sector that can underpin our healthy economy,” she said.

Corporate Taxation: An International Comparison (2006 Update)