Corporate tax cut vital for FDI

These days the PML-N government-elect is eyeing massive FDI inflow in energy and telecom sectors. A Business Recorder story published on Saturday reported that the Board of Investment (BoI) is also trying to get a FDI strategy approved by the government, which envisages BoI as an efficient administrative broker between foreign investors and Pakistani authorities.
The five-year strategy paper also talks about organising exhibitions and establishing Special Economic Zones amongst a host of other measures. Of the many things that BoI’s strategy paper fails to highlight, as a part of its policy advocacy function, is the need to lower corporate tax rates.
Pakistan’s corporate tax rate is clearly higher than regional and global averages. And it’s not as if that high corporate tax rates are necessary for higher tax/GDP ratios. If anything, the graph here implies otherwise.
The USA has corporate tax rate as high as 40 percent, but it does not really have a phenomenal tax-to-GDP ratio. All other developing economies shown in the graph have lower corporate tax rates but fairly better tax-to-GDP ratios.
Policymakers should also take a cue from the 2013-report of FDI Intelligence – a FDI specific magazine of the Financial Times Group.
The study - that looked at 46 countries around the world representing 80 percent of world’s GDP in 2011 that attracted 70 percent of FDI projects between 2010 and 2012 – showed that FDI inflow per GDP has a strong positive relationship with lower corporate tax rate. The strong relationship between tax and FDI has also been found both at country and at the city level.
In another study, cited by FDI Intelligence, it was found that for every one percentage point decline in corporate tax, FDI job creation increases by at least four percent, depending on the starting level of corporate tax.
In the case of Pakistan, corporate tax rates are important, since they constitute a significant percentage of total income taxes. This means a trade off exists between attracting FDI (by lowering corporate taxes) and high overall tax collection – unless of course the PML-N government makes bold moves to bring about tax reforms to create room for lower corporate taxes.

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COMPARATIVE CORPORATE TAX RATES

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                                2008      2013

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Europe average                    22     20.67

Asia average                   27.99     22.36

EU average                     23.29     22.74

Global average                 26.12     24.08

OECD average                   26.05      25.4

Latin America average          27.96     27.61

North America average          36.75        33

Pakistan                          35        35

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Source: KPMG.

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