The lowest corporate taxes among the developed economies are still to be found in the countries of the European Union, KPMG Internationa’s latest global corporate tax rate survey has found. Canada, however, stands out as having one of the highest corporate tax rates in the world.

In a review of corporate tax rates at the beginning of 2007 in 92 countries, the average rate in the EU was 24.2%, compared with 27.8% in the OECD countries, 28% in Latin America and 30.1% in Asia-Pacific. Among developed economies, Canada’s corporate tax rate of 36.1% is one of the highest. However, the United States and Japan still have higher corporate tax rates at 40% and 40.7% respectively.

This is the fourth year that European rates have been below those of the Latin American countries and the sixth that they have been below those of Asia Pacific. Additionally it is 11 years since average rates in the OECD nations were below those of Europe.

But the survey also found that indirect taxes in Europe are the highest in the world. Value Added Tax (VAT) or Goods and Services Tax (GST) rates in the EU countries average 19.5%, compared with 17.7% in the OECD, 14.2% in Latin America and only 10.8% in Asia Pacific. Canada’s average federal GST is 6%. Additionally, all provinces, except for Alberta, impose a form of GST or retail sales tax at rates ranging from 6% to 10%, on the sales of taxable goods and services.

“This is the first year that we have added indirect taxes to our long-running survey of international corporate tax rates,” says KPMG Canada’s National Indirect Tax Leader, Deb Taylor, “and the figures seem to confirm a global trend for indirect taxes to rise to compensate for lower corporate tax rates.”

“The highest indirect taxes in the world, over 25%, are found in Denmark, Norway and Sweden. Each of these countries has a corporate tax rate of 28%, which puts them at the upper end of the corporate tax rate scale,” Taylor adds.

“However, they are still some way behind the U.S. and Japan, whose corporate tax rates of 40% and 40.7% respectively make them the most expensive of the developed economies for corporate taxpayers. Japan’s main indirect tax rate is 5%, while the U.S. does not have a federal GST, but the states impose their own sales taxes at various rates,” Taylor says.

Across the OECD countries, the average VAT rate has held steady over the past six years at around 18%, while the average corporate income tax rate has fallen by more than a tenth, from 31.4% to 27.8%. So without changing rates, VAT and VAT type taxes have become steadily more important to national governments.

This seems to be a trend, but a cautious one, and some commentators have asked why governments do not rely even more heavily on indirect tax revenues. One answer is that higher indirect taxes are politically difficult to introduce. The link between higher indirect taxes and higher prices is obvious to anyone who buys goods and services, as clearly this is a disincentive for consumer spending. The link between lower corporate tax rates and increased corporate investment in Canada, with the increased employment and infrastructure development it can bring, is less well understood.

“We only have one year’s figures for indirect taxes, so it is too early for us to say definitively that there is a link. But this does coincide with what many governments say about the decisions they are making. It’s interesting that, with our high corporate tax rate and recent GST rate cut, Canada appears to be bucking this trend,” says Taylor.

Globally, the reduction in corporate tax rates from 2006 to 2007 has been very slight, from 27.2% to 26.8%. This is much less than the year-on-year reductions of the 1980s and 1990s. Canada has remained at 36.1% since 2004, with its most recent dramatic reduction (from 44.6% to 38.6%) occurring between 2000 and 2002.

But some countries have made significant cuts, such as Turkey’s reduction from 30% to 20% and Bulgaria’s reduction by 5% to 10%. There are also reductions in the pipeline from Germany, Spain, the U.K., Singapore, China and possibly in France, which should be reflected in future KPMG surveys.