Mon. Apr 15th, 2024

How Tax Competitiveness Impacts the International eDiscovery Landscape

Editor’s Note: Published annually since 2014 by the Tax Foundation, the International Tax Competitiveness Index (ITCI) ranks Organisation for Economic Co-operation and Development (OECD) countries based on how their tax systems promote sustainable economic growth and investment.

The ITCI analyzes over 40 variables across five tax categories: corporate taxes, consumption taxes, property taxes, individual income taxes, and cross-border tax rules. It aims to identify which countries have tax policies that keep rates low, minimize distortions, and are simple for taxpayers to navigate.

As an increasingly global industry, eDiscovery businesses operate across multiple jurisdictions. The ITCI provides crucial intelligence on how different countries’ tax policies impact competitiveness and growth.

Key factors like corporate tax rates, R&D incentives, VAT design, and cross-border rules influence where eDiscovery firms invest and expand. The ITCI allows strategic assessments of optimal locations based on tax climate.

For example, Estonia’s tax system consistently ranks 1st on the ITCI. Its corporate cash flow tax and broad VAT may enhance eDiscovery competitiveness there. New entrants should assess Estonia’s tax policies when developing European strategies.

By spotlighting best practices globally, the ITCI provides eDiscovery firms with benchmarking intelligence to evaluate their current operating locations and help inform expansion strategies and investment decisions.

Industry Report Summary

Scoping eDiscovery Expansion? How Tax Competitiveness Impacts the International eDiscovery Landscape #

ComplexDiscovery Staff

The Top Line

The International Tax Competitiveness Index (ITCI) provides vital insights for policymakers, business leaders, and citizens on how countries’ tax policies impact economic growth, investment, and competitiveness. By comprehensively ranking OECD nations based on more than 40 tax policy variables, the ITCI illustrates the structural features that make some tax systems more efficient and productive at raising revenue than others. The 10th annual edition of the ITCI comes at a crucial moment as countries weigh tax reforms during a turbulent global economy.

For eDiscovery firms with global operations, the ITCI offers intelligence on how countries’ tax regimes affect competitiveness and growth. Factors like tax rates, incentives, VAT rules, and territorial systems influence where eDiscovery businesses invest and expand.

2023 Rankings & Notable Changes

For the 10th consecutive year, Estonia claims the top spot on the ITCI. Several pro-growth aspects of its tax code drive Estonia’s #1 ranking, including its corporate cash-flow tax that only taxes distributed business profits, allowing companies to reinvest earnings tax-free. Estonia also boasts a broad value-added tax (VAT) base and only levies property taxes on land value, not structures.

Right behind Estonia in the rankings is Latvia, which recently adopted a similar cash-flow corporate tax system. New Zealand, Switzerland, and the Czech Republic round out the top five nations.

Notable changes in the 2023 ITCI rankings include the United Kingdom sliding from 27th to 30th place, continuing its decline over recent years. The UK’s fall came after it phased out full expensing for capital investments and hiked its corporate tax rate in 2023. On the upside, Turkey jumped from 10th to 7th in the rankings on the back of lowering its corporate tax rate from 23% to 20%.

For eDiscovery firms, monitoring changes in countries’ rankings can reveal evolving tax environments and reform opportunities globally. Shifts like Turkey’s rate cut and the UK’s new expensing phase-out provide intelligence on potential future locations.

Key Findings on What Makes Tax Systems More Competitive

Corporate Tax Rates and Investment Incentives Still Impact Competitiveness

The average corporate tax rate among OECD nations stands at 23.6% in 2023. However, rates vary widely from Hungary’s low 9% to Colombia’s high 35% top rate. While many factors affect countries’ ability to attract business investment, corporate tax rates significantly influence the cost of capital. Jurisdictions with lower corporate tax rates tend to enjoy more business investment and faster economic growth over time, making them more competitive.

In addition to statutory rates, 17 OECD countries offer patent box regimes that provide special lower tax rates on income derived from intellectual property. However, research suggests these targeted patent box incentives primarily shift income across jurisdictions rather than generate substantial brand-new innovation or growth. More impactful for competitiveness than narrow incentives are structural reforms like full expensing of all business investments and lower overall corporate tax rates.

eDiscovery firms looking to expand or relocate operations globally can use corporate tax rate differences and incentives revealed by the ITCI to inform investment strategies. Jurisdictions like Estonia and Hungary, with lower rates and broad investment expensing, may offer advantages.

Individual Income and Payroll Taxes Impact Work and Talent Attraction

The average top personal income tax rate across the OECD currently sits at 42.5%. Still, it ranges from just 21.6% in Estonia to 57.3% in Italy when factoring in social security contributions and surtaxes on high earners. In total, 26 of the 38 OECD nations levy additional surtaxes atop their top statutory personal tax rates. Higher marginal rates on individual income tax can discourage entrepreneurship, risk-taking, and working additional hours and make attracting global talent and human capital more difficult.

All OECD countries also impose social security payroll taxes on top of individual income taxes to fund benefits like retirement and unemployment insurance. Payroll taxes raise the cost of employing labor. The average total tax burden on labor across the OECD is 34.6% but stretches from a low of 7% in Chile to over 50% in some European nations. Jurisdictions with lower payroll tax burdens enjoy a workforce competitiveness advantage by having lower labor costs.

For eDiscovery firms, the ITCI highlights jurisdictions where talent and workforce costs may be lower due to reduced tax burdens on highly skilled labor and employees. Locations like Estonia and Chile stand out.

Consumption Tax Design Drives Efficiency

Consumption taxes like value-added taxes (VAT) and sales taxes are vital revenue sources for almost every national government. However, design differences dramatically impact economic efficiency. New Zealand has the broadest VAT base, raising revenue equal to 101.7% of total consumption. Meanwhile, Greece collects VAT revenue equivalent to just 36% of consumption, reflecting exemptions and multiple rates. VAT exemptions require higher standard tax rates to raise sufficient revenue, which induces more economic distortions.

Chile and Mexico maintain the lowest VAT rates in the OECD at just 19% each. Hungary levies the highest standard VAT rate at 27%. Broader VAT bases allow countries to rely on lower rates while raising revenue. Lower rates with broad bases help limit detrimental impacts on business activity and consumption.

For eDiscovery businesses, the ITCI spotlights jurisdictions like New Zealand where efficient VAT systems exist. It also identifies nations with higher VAT burdens to potentially avoid.

Property Taxes on Capital Reduce Investment and Growth

Some property taxes directly reduce savings and investment by households and businesses. 14 OECD countries levy recurring taxes on household net wealth, while 28 others impose estate taxes or inheritance taxes upon death. These recurring taxes on capital raise hurdles for wealth accumulation and hurt productivity over time. Estonia is the only OECD nation that does not levy any taxes on property outside of land value itself.

The United Kingdom and the United States impose the largest property tax burdens, with revenue equaling 1.8% and 1.7% of total private capital stock value, respectively. This heavy recurrent taxation of property acts as a direct tax on the capital stock of corporations and investors, forming another barrier to investment and growth.

For eDiscovery firms, the ITCI shows locations where investment-hampering property taxes are lower or non-existent, like Estonia. It also flags nations with higher property tax burdens to potentially avoid.

Cross-Border Rules Impact Firms’ Global Footprint

In today’s globalized economy, how countries tax foreign profits greatly influences where businesses choose to invest and locate operations. 31 OECD nations have moved to territorial tax systems that largely exempt foreign profits of domestic companies from taxation in the home country. This compares to over 20 countries taxing worldwide corporate profits back in the 1990s. However, major economies like the United States and Japan still partially tax certain categories of foreign earnings. Adopting more territorial systems can provide domestic companies a competitiveness boost on the global playing field.

In addition, jurisdictions levy a wide range of withholding taxes on cross-border dividend, interest and royalty payments between affiliate entities. Rates stretch from 0% in Hungary, Latvia, and the Netherlands to as high as 35% in Chile and Switzerland. Lower withholding taxes help attract foreign investment by reducing tax barriers to international economic activity.

For multinational eDiscovery companies, the ITCI highlights which nations have adopted more competitive territorial tax systems and lower cross-border taxes. These factors directly impact the costs of international business expansion.

The Bottom Line

The 2023 International Tax Competitiveness Index highlights the tax policies most likely to promote sustainable, long-term economic growth. Low tax rates, efficient tax design, and neutral tax treatment across savings, investments, and industries should be the goals of every country’s tax system. By leveraging the intelligence provided in the Index, companies in the eDiscovery ecosystem can pursue tax strategies that transform economic liabilities into assets.

Read More on the ITCI Report #

CITE: Mengden, A. (2023). International Tax Competitiveness Index 2023 (10th ed.). Tax Foundation.

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Additional Reading

Source: ComplexDiscovery

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