Corporate tax rate reduction—large businesses

Budget Review 2016–17 Index

Les Nielson

Proposed changes

Over a 10 year period, starting from 1 July 2016, the company tax rate for all companies is to be reduced to 25 per cent. This will be achieved by progressively lifting the aggregated turnover threshold at which the small company tax rate of 27.5 per cent applies (see separate brief - Small company tax rate reduction). [1] The 27.5 per cent rate will then apply to all companies at which point in time, in 2024–25, the overall company tax rate will progressively reduce to 25 per cent. Table 1 sets out this time line:

Table 1: Time line for reduction in large company tax rate

Year Aggregated turnover threshold ($m) Rate (%)
2016–17 10 27.5
2017–18 25 27.5
2018–19 50 27.5
2019–20 100 27.5
2020–21 250 27.5
2021–22 500 27.5
2022–23 1,000 27.5
2023–24 1,000 27.5
2024–25 All companies regardless of turnover 27.0
2025–26 All companies regardless of turnover 26.0
2026–27 All companies regardless of turnover 25.0

Source: Budget Paper No: 2[2]

Companies with an aggregated turnover above the relevant threshold in any one year would, until 2024–25, still be subject to a tax rate of 30 per cent.

International comparisons

Table 2 shows current and proposed corporate tax rates for selected OECD countries and Singapore:

Table 2: Current and future corporate tax rates, selected countries

Country Rate in 2015 (%) Lowest future rate (%)
Australia 30.0 25.0 in 2026–27[3]
Canada 26.3
France 34.43
Germany 30.18
Ireland 12.5[4]
Japan 32.11
Korea 24.2
Luxembourg 29.22 26.08 in 2018[5]
Netherlands 20-25[6]  
New Zealand 28.0
Singapore 17.0[7]  
Spain 28.0 25.0 in 2016[8]
Sweden 22.0
United Kingdom 20.0 17.0 in 2020[9]
United States 39.0[10]

Source: OECD Tax Data Base[11]

The above table shows the combined corporate tax rate for central and sub-central governments, where the latter also imposes corporate tax. While is tempting to compare Australia’s headline corporate tax rate with those of other countries, regard should be had to the existence of the dividend imputation system, which only Australia and New Zealand have full implemented, which dramatically lowers the total tax collected from corporate profits.[12] The future tax rates are those that have been publically declared to date. They are unlikely to be the only such reductions.

Economic impact

The government claims that a more competitive company tax rate will generate economic activity encouraging investment, raising productivity, increasing Gross Domestic Product (GDP) and, over time, raising real wages and living standards.[13]

Any relationship between corporate tax rates and economic benefits is complex.[14] Further, the research is not conclusive and support can be found for both sides. [15] To the extent that there are benefits to lowering the corporate tax rate, there is a question about the time they will take to materialise and whether that will occur over the timeframe indicated by the Government. The Parliamentary Library can provide members and Senators with information about the available research.

Cost

Over the forward estimates period (to 2019–20) the proposed changes are to cost about $2.7 billion.[16] Over the full ten-year phase-in period to 2026–27, the Treasury Secretary has estimated that the changes in the main corporate tax rate, together with all the changes flowing from lifting the small business entity threshold, will cost the Commonwealth Budget $48.2 billion in cash terms.[17]



[1].          A company’s aggregated turnover is defined as annual turnover of the business plus the annual turnover of an associated or affiliated business. According to Section 328–120 of the Income Tax Assessment Act 1997 ‘annual turnover for an income year is the total ordinary income that the entity derives in the income year in the ordinary course of carrying on a business’.

[2].          Australian Government, Budget measures, budget paper no. 2: 2016–17, 2016, p.41.

[3].          Ibid.

[4].          A 6.25% rate applies in company engaged in research and development. See M Noonan (Irish Minister for Finance), Financial Statement, 13 October 2015, Fostering Innovation.

[5].          PriceWaterhouseCoopers, Luxembourg Government announces 2017 tax changes, 29 February 2016, p. 1.

[6].          Actual rate depends on corporate taxable income, if taxable amount is less than €200,000, the tax rate is 20%.

[7].          Singapore Government, Inland Revenue Service, Corporate Tax Rates, Corporate Income Tax Rebates, Tax Exemption Schemes and SME Cash Grant, website.

[8].          PriceWaterhouseCoopers, Tax Summaries, Spain, 2016.

[9].          HM Revenue and Customs, and HM Treasury, Overview of Tax Legislation and Rates, March 2016, p. 10.

[10].       This is a maximum rate. However, actual rates may be less than this headline rate; through either the application of the alternative minimum tax or the progressive corporate tax scale at a federal level.

[11].       OECD Tax Database, Corporate Tax Rates.

[12].       See K Davis (reviewed by W Smith), ‘FactCheck: Is Australia’s corporate tax rate not competitive with the rest of the region’, The Conversation, 10 February 2016.

[13].       Australian Government, op. cit. This view is supported by the Henry Tax Review, K Henry (Chair), H Ridout, G Smith, J Harmer, J Piggott, Australia’s future tax system Report to the Treasurer Part One Overview, December 2009, p. 18 and p. 74 and by a wide range of neo-classical economic studies ,see W. McBride, What Is the evidence on taxes and growth, Review Article, Online Edition, (US) Tax Foundation, 18 December 2012.

[14].       J Freebairn, ‘Explainer: how company versus personal tax cuts boost the economy’, The Conversation, website, 21 March 2016.

[15].       J G Gravelle and D J Marples,  ‘Tax Rates and Economic Growth‘, Congressional Research Service , Report for Congress, 7-5700, R42111, 2 January 2014, p. 1. See also T L Hungerford, ‘Taxes and the economy: An economic analysis of the top tax rates since 1945 (Updated)’ Congressional Research Service, Report to Congress, 12 December 2012. See also D Richardson, ‘Corporate tax avoidance’, The Australia Institutes submission to the Senate Economic References Committee Inquiry into Corporate Tax Avoidance, February 2015, pp. 3 and following.

[16].       Australian Government, op. cit.

[17].       J Fraser (Treasury Secretary), Opening statement, Senate Economics Legislation Committee—2016–17 Budget Estimates, Treasury media release, 6 May 2016.

 

All online articles accessed May 2016. 

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