The International Tax Competitiveness Index measures the extent to which a country’s tax system adheres to two important aspects of tax policy: competitiveness and neutrality.
A competitive tax code is one that keeps marginal tax rates low. In today’s globalized world, capital is highly mobile. Businesses can choose to invest in any number of countries throughout the world to find the highest rate of return.
This means that businesses will look for countries with lower tax rates on investment to maximize their after-tax rate of return. If a country’s tax rate is too high, it will drive investment elsewhere, leading to slower economic growth. In addition, high marginal tax rates can lead to tax avoidance.
According to research from the OECD, corporate taxes are most harmful for economic growth, with personal income taxes and consumption taxes being less harmful. Taxes on immovable property have the smallest impact on growth.
Portugal is in 32nd place for last year, ahead of France, Italy and Poland but lower than Spain, the UK, Denmark and Ireland.
The 2018 index is headed by Estonia, for the fifth year in a row, with a 20% corporate tax rate applied only to distributed profits. Secondly, it has a flat 20% income tax that does not apply to personal dividend income. Thirdly, Estonia’s property tax applies only to the value of land, rather than to the value of real property or capital. Finally, it has a territorial tax system that exempts 100% of foreign profits earned by domestic corporations from domestic taxation, with few restrictions.
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