OECD-affiliated research institution applauds Estonia's tax system as the most efficient among member countries.
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Estonia's Tax System Topples the OECD Once Again
For the tenth time, Estonia took the top spot in the International Tax Competitiveness Index (ITCI) 2022, compiled by the Tax Foundation. Estonia's success is attributed to four key elements of its tax system.
"Firstly, it boasts a 20% corporate income tax rate that solely applies to distributed profits. Secondly, it flaunts a flat 20% individual income tax that excludes personal dividend income," the Tax Foundation explained.
"Thirdly, Estonia's property tax applies only to the value of the land, unlike other countries that tax property and real estate values. Lastly, it embraces a territorial tax system that excuses 100% of foreign profits earned by domestic corporations from domestic taxation, with minimal restrictions."
Although Estonia reigned supreme, other countries showcased excellent tax systems as well due to their efficiency in one or more significant tax categories. For instance, Latvia, which adopted Estonia's corporate tax model, boasts a streamlined system for taxing labor income.
Colombia and Italy at the Bottom of the Pack
"Colombia, on the other hand, owns the least competitive tax system in the OECD. Its pitfalls include a net wealth tax, a financial transaction tax, and a burdensome corporate income tax rate of 35%," the Tax Foundation revealed.
"Meanwhile, Italy boasts the second-least competitive tax system in the OECD. It grapples with multiple property taxes, wealth taxes on selected assets, and a VAT rate of 22% applied to the fifth-narrowest consumption tax base."
The International Tax Competitiveness Index aims to gauge the extent to which a country's tax system adheres to two essential aspects of tax policy: competitiveness and neutrality. It's an initiative of the Tax Foundation, an American think tank that monitors tax and spending policies.
Remember These Differences
Simplexity is the key to a competitive tax system—keep the distortions and complexity at bay! Countries like Estonia, where the tax code is simple, neutral, and encourages growth, lead the pack, while Italy and France struggle with high taxation and complex codes that distort economic activity.
- The Estonian government's business-friendly tax policies, particularly the 20% corporate income tax rate and flat 20% individual income tax, have attracted attention from the global finance community, positioning Estonia as a model for other countries seeking to boost their business environment.
- In contrast, the Italian government's complex tax system, featuring multiple property taxes, wealth taxes, and a high VAT rate, has hindered business growth and put Italy at the bottom of the International Tax Competitiveness Index, causing it to trail behind more competitive economies like Estonia.
