For the 13th year in a row, Estonia is the country with the most competitive tax code in the Organisation for Economic Co-operation and Development, according to the Tax Foundation’s annual International Tax Competitiveness Index.
Estonia’s top score is driven by four positive features of its tax system.
“First, it has a 22 percent tax rate on corporate income that is only applied to distributed profits. Second, it has a flat 22 percent tax on individual income that does not apply to personal dividend income,” the Tax Foundation says.
“Third, its 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 percent of foreign profits earned by domestic corporations from domestic taxation, with few restrictions.”
Other countries excel, too
While Estonia’s tax system is the most competitive in the OECD, the other top countries’ tax systems receive high scores due to excellence in one or more of the major tax categories.
“Latvia, which recently adopted the Estonian system for corporate taxation, also has a relatively efficient system for taxing labor income. New Zealand has a relatively flat, low-rate individual income tax that also largely exempts capital gains (with a combined top rate of 39 percent), a broad-based VAT, and levies no taxes on inheritance, property transfers, assets, or financial transactions.”
“Switzerland has a relatively low corporate tax rate (19.5 percent), a low, broad-based consumption tax, and an individual income tax that partially exempts capital gains from taxation. Lithuania has a low corporate tax rate of 17 percent, allows businesses to fully expense the capital investment costs for machinery, equipment, and intangible rights, and levies a relatively flat and low-rate individual income tax,” according to the Tax Foundation.
France has the least competitive tax system in the OECD.
“It has the highest top corporate tax rate in the OECD, at 36.1 percent, including multiple surtaxes and distortive production taxes. It also applies multiple distortionary property taxes with separate levies on estates, bank assets, and financial transactions, in addition to a wealth tax on real estate. Its VAT covers about 50 percent of final consumption, and it has one of the highest VAT registration thresholds.”
High tax rates on corporate income
Countries that rank poorly on the index often levy relatively high marginal tax rates on corporate income or have multiple layers of tax rules that contribute to complexity.
“Four of the five countries at the bottom of the rankings have higher-than-average combined corporate tax rates. Four out of the five countries have unusually narrow VAT bases, covering only between 35 and 50 percent of final consumption. They also tend to levy many distortive taxes on narrow bases, with four out of the five bottom five countries applying digital services taxes, financial transaction taxes, and inheritance taxes. Four out of five of the lowest-ranking countries also levy either some type of wealth tax or capital duties (or both).”
The Organisation for Economic Co-operation and Development is an intergovernmental organisation of 38 member countries, established in 1961 to promote economic progress and global trade. It serves as a forum for nations committed to democracy and the market economy, offering a platform to compare policy experiences, address shared challenges, identify best practices and coordinate both domestic and international policies.
The Tax Foundation is an American think tank based in Washington, DC. Founded in 1937 by a group of business leaders, it was created to “monitor the tax and spending policies of government agencies.”
