The latest round of global reductions in corporate tax rates is being led by the island city-state of Singapore, which is expected to cut its headline rate by at least one percentage point to 19% in its budget announcement on 15 February.

As KPMG’s long-term corporate tax rate survey published last year demonstrated, tax rate reductions are taking place all across the world.

For governments, though, it is a gamble. Describing the dilemma facing every head of state, Singapore’s prime minister, Lee Hsien Loong, said: ‘We have to plan ahead to make sure that we have enough revenues. If we have to bring our corporate tax down, every percentage point reduction will cost us $400m a year.’
His solution is to keep revenue coming into the government’s coffers by raising indirect taxes, but at the same time increasing efforts to make sure companies are compliant on corporate tax.

Although companies will reap the benefits of a lower tax burden, there is a quid pro quo. A lower corporate tax rate carries with it an obligation to improve tax transparency, so that tax authorities can assess the impact and effectiveness of their policies. Governments need this information to demonstrate to their electorates that the tax system is fair, and the gamble is paying off.

Companies shouldn’t be surprised if lower tax rates come with a clear increase in interest in their activities from the tax authorities. And more government scrutiny will be accompanied by greater interest from the media, investors and analysts.

Is this a threat? I don’t think so. Heightened interest in tax presents forward-thinking companies with an opportunity to improve their value in the eyes of the market.
By voluntarily communicating a strong, sustainable and responsible tax policy to the outside world, corporates can build additional value for investors.

The incidental benefits of such a strategy include a defence against aggressive tax challenges and better business planning. But the main point is that just as good general corporate governance has become a necessary part of the informal ‘licence to operate’ that markets grant companies, so tax transparency and good communication of tax policy are becoming things that markets and governments expect.

Some companies will not move until there is a crisis. But rather than wait, companies can get ahead of the curve by recognising now that as tax rates fall, so tax governance is an emerging global issue that is setting new standards for transparency in tax across the whole world.

Loughlin Hickey is head of KPMG’s global tax practice