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Finding solutions to climate change and natural resource depletion will require huge investment by the private sector.
Governments are looking for efficient ways to encourage this investment, and business taxes are a key policy lever. But the public tends to focus on corporate income tax because it is the only tax payment reported as part of financial statements. Businesses, on the other hand, care much more about the total tax cost and stability of tax policies.
To encourage fairer and more effective policies, governments and businesses need to speak in terms of total tax contribution.
Corporate income tax is only part of the total contribution that companies pay in taxes. A recent study by the World Bank Group's International Finance Corporation (World Bank IFC) and PricewaterhouseCoopers shows that globally (across 181 economies worldwide), corporate income tax accounted for only 37 percent of the total tax rate, 13 percent of the tax payments made and 26 percent of the compliance time in 2008.
The total tax contribution includes taxes borne (the taxes that impact on the profit and loss account) and taxes collected (the taxes where the business effectively acts as an unpaid tax collector on behalf of government).
This total cost is much more important to business than the headline rate of corporate income tax, and it more adequately reflects the tax contribution of a company to the country in which it operates.
In a list of five influences on investment decisions, the lowest percentage of CEOs (64%) said that that the statutory rate of income tax was critical or important. The second highest (72%) said the total amount of taxes, after allowances and deductions, was critical or important.
In addition to tax rates, CEOs are concerned about the clarity and stability of tax policies. In fact, clarity and stability ranks first on the list of investment influences. Eighty-one percent of CEOs believe it is critical or important, sending a strong message that knowing exactly how much tax will be paid on a transaction is more significant than shaving a few dollars off the bill.
Similarly, the overall ease of compliance is important, but CEOs are more interested in knowing exactly what governments expect and in being assured that policies will not change at short notice.
Finally, the administrative costs associated with tax compliance are also important to business. CEOs would like to see more inter-governmental co-operation and coordination on global tax systems to reduce the administrative burden.
To be most effective, this collaboration should include tax authorities, which already co-operate with one another to police tax evasion, but which could also share best practices for streamlining regulations and compliance. If tax authorities make it easier for businesses to pay taxes, they will also increase the predictability of governmental revenues.
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