October 26, 2009 COMPARATIVE TAXES

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2 page 2 Corporate Taxes: Comparison of Key Economies Governments often deploy corporate tax rates strategically to encourage enterprise growth, attract foreign investments and to stimulate a country s economy. The current global financial crisis has created a dilemma for the governments of most industrialized economies: while these governments realize the need for reducing their tax rates to stimulate their economies, most of them confront large and looming budget deficits - most caused by the government s fiscal stimulus plans to shore up their economies - that can only be reduced through increased taxation in the future. As a result, the tax policies announced by major economies in 2009 have varied greatly. Given this uncertain and changing tax environment, it is essential for business executives to understand the comparative tax landscape and analyze its impact on their ventures. This document provides such a comparison for six important world economies: United Kingdom, USA, India, Australia, Russia, and Singapore. Tax rates for the year 2009 and beyond have been used in this analysis, unless otherwise specified. Each country s tax policies differ from those of the others in the exemptions, incentives, and depreciation allowances that they permit. The major exemptions available to companies have been considered in this analysis but their subtle and esoteric nuances have been ignored. Furthermore, some countries impose additional taxes at the state or local level (such as in the USA) or impose indirect taxes. These have been ignored in this analysis. Finally, the authors wish to emphasize that there are several other tangible and intangible factors that must be considered in addition to a country s tax structure when deciding whether or not to relocate a business in that country. These factors include the overall health of the country s economy, its growth rate, its political and business environment, its adherence to rule of law, its quality of life, its infrastructure, etc. The table below provides a summary of the three types of taxes imposed by each country on companies that are ordinarily resident in its tax jurisdiction: taxes on corporate profits, tax on dividends, and tax on capital gains. For easy comparison, the table also provides the approximate tax a hypothetical startup company would pay in each jurisdiction if it had an income of US$300k. Tax Category UK USA India Australia Russia Singapore Tax on corporate profits 21% to 28% 15% to 35% 33.99% 30% 20% 18% Tax on dividends 22.5% 0% to 35% 15.45% 0% 9% to 15% 0% Tax on Capital Gains 21% to 28% 15% to 35% 20% 30% 20% 0% Tax for Hypothetical Company $63,000 $100,250 $101,970 $90,000 $60,000 $34,000 UK UK imposes two types of corporate tax rates: Main rate and Special rate (the Special rate is also known as the Small Companies rate). A company pays taxes at one of these rates depending on the amount of income it generates. Tax at the Main rate is payable by companies whose taxable income is over 1,500,000. Special rate is applicable to small companies that have a taxable income not exceeding 300,000. Companies with income between 300,000 and 1,500,000 are taxed at an effective marginal relief rate, to ease the transition

3 page 3 from special rate to main rate. For the year 2009, the Main rate is set at 28% while the Special rate is 21%. Plans to increase the Special rate to 22% were shelved in the 2008 pre-budget but it is likely that such a move will be considered again in the near future. Dividends received by shareholders are taxed at two different rates depending upon the overall taxable income of the shareholder. If the overall taxable income of the shareholder (after allowances) falls below the basic rate Income Tax limit which for the tax year is 37,400 then the dividend tax rate is 10%. But if the overall taxable income of the shareholder is above the basic rate Income Tax limit then dividends are taxes at 32.5%. However, a tax credit equal to 10% of the dividend income is available to the shareholder to offset against any Income Tax that may be due on their 'dividend income'. Thus, shareholders paying taxes at or below the basic rate of 10% need not pay any tax, because the liability is set off by the tax credit. For those paying the higher rate of 32.5%, after deducting the tax credit, the effective tax liability is 22.5% of the dividend income. US US continues to impose the second-highest overall corporate tax rate among industrialized economies. Apart from Federal Corporate Tax that all business entities have to pay, most US states and some municipalities also impose income taxes on corporations. Furthermore, these local rates vary and the basis of arriving at the taxable income also varies; several states impose tax on gross margin or gross sales instead of on net income. Foreign companies can seek federal tax relief under foreign tax treaties, but they may still be liable for the local and state taxes. Other taxes that may be levied at the state level include real and personal property tax, franchise tax, intangibles tax, transfer tax, and tax on capital. The net effect is that US companies pay an average combined (Federal+ State) tax of approximately 39.3%. With the tax changes proposed by the Obama administration, in 2010 the tax burden on companies will further escalate to as high as 46.2% At the federal level, taxable income is classified into 8 income brackets and the rates progressively rise from a low of 15% for the lowest bracket of US$0-50,000. For income above US$100,000 the rate rises to 39%. The highest bracket for income over US$18,333,333 is taxed at a flat rate of 35%. Furthermore, companies may also be subject to the dreaded Alternate Minimum Tax or AMT. The notion of AMT was developed to prevent companies from avoiding tax payments through the use of various corporate loopholes and deductions. The AMT amount is calculated using a flat rate of 20% on the taxable income of companies; if the AMT amount is greater than the regular tax liability derived after deducting preferential treatment of certain items from income then the company must pay the AMT tax. Thus, a minimum federal tax of 20% has to be paid by most corporations. Business entities that are not corporations, such as partnerships and limited liability companies, under certain conditions may elect to be treated for tax purposes as corporations. Conversely, a closely-held corporation formed in the US that meets certain shareholder and capital structure limitations may elect that the corporation should not be taxed, instead its shareholders should be taxed on the corporation's income as it arises. Such entities are called S corporations and they cannot have non-resident individuals or corporations as shareholders.

4 page 4 In addition to the corporate taxes, any dividends that a corporation pays to its shareholders are further taxed at the level of the receiving shareholders. However, in 2003 certain tax changes were implemented by the Bush administration in order to mitigate this double tax burden. Ordinary Dividend income is taxed at ordinary tax rate i.e. 10%-35% depending on the taxpayers income bracket. But ordinary dividends that meet certain criteria are classified as Qualified Dividends and are taxed at the rate of long-term capital gain tax. From 2008 to 2010, the tax rate on Qualified Dividends was reduced to 0% for taxpayers in the 10% and 15% ordinary income tax brackets. However, from 2011 all dividends will be taxed as ordinary income and ordinary income tax rates will apply. A tax liable company is required to prepay its estimated tax liability in four installments. Penalties may be assessed if estimated installments are less than 100% of the actual liability. India All companies incorporated in India are considered to be domestic Indian companies for tax purposes, even if a foreign company owns them. For Indian companies, income is taxed at a flat rate of 30% while foreign companies pay 40%. A surcharge of 10% (2.5% in case of foreign companies) of the income tax is levied if the taxable income exceeds Rupees. 1 million. In addition, an education tax (called the Educational CESS) of 3% on tax is also payable. This surcharge and the Education CESS is not applicable to Limited Liability Partnerships and only 40% of its income is taxable. Thus, the net effect of these regulations is that the effective tax rates are 33.99% for domestic companies and 41.2% for foreign companies. In early August the finance ministry unveiled proposal to cut the corporate tax from the present 30% to 25% for both domestic and foreign companies; however, these changes have not yet been debated or approved. Dividend Distribution tax is big issue for companies operating in India. Dividend income received by individuals is exempt from tax. But a 15% Dividend Distribution Tax and an additional surcharge of 3% has to be paid by companies before they can made any dividend distribution. India taxes capital gains taxes under two different categories: long-term capital gains and short-term capital gains. Long-term Capital Gains Tax is charged if the capital assets are held for more than three years or for more than one year in case of assets that consist of shares, securities listed on a recognized stock exchange in India, or units of specified mutual funds. Long-term capital gains are taxed at a basic rate of 20%. However, long-term capital gains from sale of equity shares or units of mutual funds are exempt from tax. Short-term capital gains are taxed at the normal corporate income tax rates. Australia The corporate income tax rate in Australia is set at a flat rate of 30% and applies to both resident and nonresident companies. A resident company is liable for income tax on its worldwide income and capital gains. A non-resident company is liable for income tax on Australian-source income only, and on capital gains from the disposal of particular types of assets that have a necessary connection with Australia. Franking credits are generated on the taxes paid by the companies. These franking credits are passed on to the shareholder along with cash dividends. The shareholders receiving the franking credits may then use these

5 page 5 credits to offset their own personal income tax payable, including claiming a refund for excess credits left over after offsetting all payable income tax. Thus corporate profits in Australia are taxed only once. The Australian government has undertaken a detailed review of its current tax system. This review will be completed at the end of 2009 and significant tax reforms are expected in the near future. Russia In 2009 Russia cut its corporate tax by 4% to 20%. This tax is split into two components: 2.5% paid to the federal budget and 17.5% paid to the regional budget. Regional authorities may reduce this tax rate to as low as 13.5% for certain categories of taxpayers, but this affects only the portion paid to the regional budget. A company is obligated to make these tax payments in advance on a monthly basis. Dividends payable by Russian companies to domestic shareholders are taxed at 9%, dividends payable by Russian companies to foreign legal entities and dividends received by Russian companies from foreign legal entities are taxed at 15%. Singapore Singapore is often cited as the leading example of a country that continues to reduce corporate income tax rates and introduce tax incentives to attract and keep global investments. Singapore has adopted a single-tier corporate income tax system, which means there is no double-taxation for shareholders; tax paid by a company on its chargeable income is the final tax and all dividends paid by a company to its shareholders are exempt from further taxation. The current corporate tax rate in Singapore is 18% but it is set to fall to 17% from This rate is well below the global average. Furthermore, several exemptions are available to Singapore companies, which further reduces their effective tax rate. From 2008, the amount of normal chargeable income qualifying for the partial tax exemption was increased to S$300,000 and the tax exemption apply as follows: The first S$10,000 in chargeable income enjoys a 75% tax exemption (i.e. only 25% of the tax due on this amount is to be paid which results in an effective tax rate of 4.5%), the next S$290,000 in chargeable income enjoys a 50% tax exemption (i.e. only 25% of the tax due on this amount is to be paid which results in an effective tax rate of 9%). Additional incentives are available to startups. A new startup company can claim full tax exemption on the first S$100,000 of normal chargeable income for its first three consecutive tax years. Effective from 2008, a further 50% exemption is given on the next $200,000 on a qualifying startup company's normal chargeable income for the first 3 years. Thus a qualifying Startup company with S$300,000 taxable income will have an effective tax rate of only 6% for the first 3 years, while startups with taxable income of up to S$100,000 will have an effective rate of 0%. Furthermore, Singapore follows a territorial basis of taxation. In other words, companies and individuals are taxed primarily on their Singapore-sourced income. Foreign-sourced income (such as branch profits, dividends, service income, etc.) will be taxed only when it is remitted or deemed remitted into Singapore. In addition,

6 page 6 tax is not levied on foreign-sourced income remitted back into Singapore provided the income is received from a country with a headline corporate tax rate of at least 15%. Summary Within the six countries considered by this report, the tax burden imposed on new firms is the smallest in Singapore while it is the highest in India. The high ranking that Singapore has received in several other independent business friendliness surveys further validates the attractiveness of Singapore as a preferred business jurisdiction. For instance, according to the World Bank s East of Doing Business Index, Singapore is ranked 1 while the other countries are ranked as follows: USA 4, UK 5, Australia 9, Russia 120, and India 133. If maximization of take-home profits were the main objective, for an entrepreneur who has the flexibility to incorporate his or her business in any of these jurisdictions, Singapore offers the most rational choice.

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