A chartered accountant is warning the government to hold the line on indirect personal taxation as a study of 26 countries revealed what its authors called “the yawning gap” between the ability of high and low tax economies to attract and retain talent and investment.

The study, conducted by UHY, the international accounting and consultancy network with affiliates in 81 countries, says the broadening gap has been driven by struggling European economies raising taxes to plug gaps in budget deficits while emerging economies like BRIC nations (Brazil, Russia India, China) are attracting more professionals – and investment.

UHY warns that higher taxation is making European economies even less competitive relative to rival low tax economies.

Managing Partner of UHY Bain & Associates in The Bahamas office John Bain warned that while The Bahamas was not included in the year-long, 26-nation study – Bain & Associates was just named to the global network last month – the country would do well to heed the results that clearly showed populations and investment followed the path of attractive personal taxation.

“The Bahamas, being a no-direct-tax destination and dependent on indirect taxes, needs to be aware of the consequences of higher taxes,” said Mr. Bain.

“The population is highly taxed indirectly, which results in the burden of taxation being skewed unfavourably towards the poor and middle class. The Bahamas government has promised a revamping of its taxation system. As some of the residual income of some European countries is astounding, this report and the comments by the country partners should be considered at the discussion phase of taxation reform in The Bahamas.”

While The Bahamas has no direct income tax and prides itself on being a tax-neutral country free of estate, personal income, capital gains and other forms of taxation, Bain estimates that the indirect taxation from Customs duties and a cornucopia of fees amounts to between 30 per cent and 40 per cent, placing this nation in a precarious position for holding on to talent.

According to the six-page UHY release issued yesterday with details of the study, the average taxpayer in a BRIC country earning $25,000 a year will keep 85 per cent of their salary.

Someone earning $200,000 will keep 75 per cent.

Higher tax countries, including those in Western Europe, are taking upwards of 50 per cent of high income salaries.

Russia, with a flat tax rate of 13 per cent across the board, was the most consistently low-tax economy while Italy and France were in the highest taxing economies for every pay scale with France taking as much as 75 per cent of incomes over $1.3 million.

“The low tax economies, not all of which are developing economies, have been able to maintain or cut their tax rates over the past year,” said UHY Chairman Ladislav Hornan.

“Traditionally, the EU (European Union) has been able to offset the effect of high taxes by offering a wide range of public services. However, tax rises in some EU countries have come hand-in-hand with sweeping cuts to public services.”

Two of the countries imposing the five highest tax rises between 2011 and 2012 for those earning $200,000 or more were the US and France. Russia’s low flat tax rate means a taxpayer earning $250,000 will take home $80,000 more per year than a worker making the same amount in Italy.

“The first response to the impact of taxation on decision-making is concern about investment,” said Mr. Bain.

“But over the long run, the more significant impact may be a brain drain with taxation driving talented professionals, especially those who are relatively young and mobile, to jurisdictions with more appealing taxation translating into more attractive income. There is a tipping point in everything and we have to be very careful in The Bahamas to take results like this into account because increases in taxation that seem to provide a temporary breather can be a long-term threat to the very economy we are trying to build. Conversely, lowering the rate of taxation may be among the smartest moves we can make to retain talent and attract investment.”

Bain & Associates, forensic accountants, was named The Bahamas affiliate to UHY in October, joining independent firms that together represent 6,800 staff in 81 nations.