Analytics, Estonia, EU – Baltic States, Financial Services, Legislation, Rating, Taxation

"In this year's index, once again Estonia enjoys the top position," the Wall Street Journal says, describing briefly, how Estonia has a uniform 20% income tax for both physical and legal persons, reports LETA.

Estonia is followed by New Zealand, which has cut its taxes on physical and legal persons and does not ask, for example, a tax on wages.

Many countries have been working hard to improve their tax codes. New Zealand is a good example of one of those countries. In a 2010 presentation, the chief economist of the New Zealand Treasury stated, “Global trends in corporate and personal taxes are making New Zealand’s system less internationally competitive.” In response to these global trends, New Zealand cut its top marginal individual income tax rate from 38 percent to 33 percent, shifted to a greater reliance on the goods and services tax, and cut its corporate tax rate to 28 percent from 30 percent. This followed a shift to a territorial tax system in 2009. New Zealand added these changes to a tax system that already had multiple competitive features, including no inheritance tax, no general capital gains tax, and no payroll taxes.

2015 International Tax Competitiveness Index Rankings

Estonia currently has the most competitive tax code in the OECD. Its top score is driven by four positive features of its tax code. First, it has a 20 percent tax rate on corporate income that is only applied to distributed profits. Second, it has a flat 20 percent tax on individual income that does not apply to personal dividend income. Third, its property tax applies only to the value of land rather than taxing the value of real property or capital. Finally, it has a territorial tax system that exempts 100 percent of the foreign profits earned by domestic corporations from domestic taxation, with few restrictions.

While Estonia’s tax system is unique in the OECD, the other top countries’ tax systems receive high scores due to excellence in one or more of the major tax categories. New Zealand has a relatively flat, low-rate income tax that also exempts capital gains (combined top rate of 33 percent), a well-structured property tax, and a broad-based value-added tax. Switzerland has a relatively low corporate tax rate (21.1 percent), low, broad-based consumption taxes (an 8 percent value-added tax), and a relatively flat individual income tax that exempts capital gains from taxation (combined top rate of 36 percent). Sweden has a lower than average corporate income tax rate of 22 percent and no estate or wealth taxes. The Netherlands has competitive international tax rules. Additionally, every country in the top five has a territorial tax system.

The index measures many factors, which indicate how friendly the government is towards companies and investors, including a review of the amount of taxes and complexity of tax rules.

International Tax Competitiveness Index (ITCI) seeks to measure the business competitiveness of national tax systems. In order to do this, the ITCI looks at over 40 tax policy variables, including corporate income taxes, individual income and payroll taxes, consumption taxes, property taxes, and the treatment of foreign earnings.

The ITCI scores the 34 member countries of the OECD based on these five categories in order to rank the most competitive tax codes in the industrialized world.