Low taxes a competitive advantage, study states.

New research covering 86 countries has confirmed that low corporate tax rates can help give a country a significant competitive advantage over economic rivals, and are connected with higher than average economic growth. But the advantage tends to be short term and has to be backed up with a good legal and economic infrastructure and targeted incentives if countries are to attract long term private sector investment.

This conclusion comes from a study by KPMG International, which analyzed international movements in corporate tax rates for the past 14 years, drawing on the annual surveys the organization has conducted since 1993.

The findings point to the economic growth enjoyed over this period by countries like Ireland, Norway, Sweden, and Denmark, and draws a parallel between this success and a favourable corporate tax regime.

The outstanding example has been Ireland, which has consistently pursued policies designed to attract new investment over the past 15 years. Its headline corporate tax rate has fallen in stages from 40% in 1993 to 12.5% today, giving it the lowest corporate tax rate of any developed country.

At its peak, the Irish economy enjoyed annual growth rates of up to 12%, although this has recently slowed to around 2.5% due to strong competition on tax rates and incentives for inward investment from Eastern European countries like Poland and Hungary.

The main exception to this trend is the U.S., which has maintained high levels of growth with a consistently high corporate tax rate of 40%. "Despite its high taxes, the sheer economic power of the U.S. market has preserved its attraction for multinational companies," said the head of KPMG's global tax practice and U.K. firm partner, Loughlin Hickey.

"But even here the effectiveness of reducing tax rates has been evident. For example, the American Jobs Creation Act of 2004, which reduced repatriation taxes from 35% to 5.3% for one year, caused U.S. companies to repatriate approximately US$300 billion during 2005, according to JP Morgan Chase."

Hickey stressed that a single reduction in taxes is not enough by itself to ensure economic success. "Once a major industrialized economy cuts its rates, others seem compelled to do the same, in a process of international tax competition that continues and intensifies over time." he said.

A full copy of the study can be downloaded at www.kpmg.com.