European Commission Study on Effective Tax Rates - · PDF filebackward-looking indicators...
Transcript of European Commission Study on Effective Tax Rates - · PDF filebackward-looking indicators...
European Commission Taxation and Customs Union
European Commission Project on Effective Tax
Rates
MENA-OECD WG3 meetingJanuary 2009
Jean-Pierre De Laet
European Commission /Taxation and Customs Union
The need for ETRs
• ECOFIN Council (1998): Commission mandate for a Comprehensive study on company taxation in the EU on
“differences in effective corporate taxation in the EU” “effects on the location of economic activity”
• Tax differentials may result in relocation of economic activity or loss of government revenue
• Statutory corporate tax rates provide limited information: no account for the diversity of elements composing the tax base no information on interrelations of different tax regimes
• A „correct‟ measure for assessing effective tax burdens involves the application of the tax rate to the tax base
European Commission /Taxation and Customs Union
The need for ETRs
• Ideally ETRs are calculated using detailed firm-level micro data. However:
backward-looking indicators depends on past history of the firm identical firms may face different economic conditions
• Analysis of the impact of taxation on investment behaviour requires forward-looking indicators which
includes the relevant taxes triggered by corporate investment make abstraction of the influence of the economic conditions.
• Comparability with previous studies (Commission, OECD) Study carried out by ZEW, Mannheim Cost of capital, EATR Domestic and cross-border investment
European Commission /Taxation and Customs Union
New features
• Full coverage of EU MS after EU enlargement
a broader range of tax policies
• The production of time series of ETRs for the EU 27 (1998-2007)
understand the dynamic effects of reforms in progress
observe trends in tax rates + tax base
• Computation of specific ETRs for SME corporations and partnerships
analytical input for a DG Enterprise study
European Commission /Taxation and Customs Union
Methodology
• Devereux/Griffith approach (1999,2003)
• Hypothetical investment :
o in a specific country (cost of capital, EMTR)
by a resident company (domestic)
by a non-resident company (cross-border)
o in two mutually exclusive locations (EATR)
• Investment takes place in one period and generates a return in the next period
European Commission /Taxation and Customs Union
Economic assumptions
• Manufacturing sector (sensitivity analysis for service sector)
• Inflation rate: 2% in all countries
• Profit rate: 20% / minimum rate of return: 5%.
• Financing (unequal weights): retained earnings 55%, new equity 10% and debt 35% (OECD 1991)
• Assets (equal weights): 20% each
• True economic depreciation rate (Ifo Munich, Leibfritz 1989): intangibles (15.35%), industrial buildings (3.1%); machinery (17.5%), financial assets (0%), and inventories (0).
European Commission /Taxation and Customs Union
Tax parameters
• Statutory tax rate + surcharges + local profit taxes and special rates applying to specific forms of income and expenditure
• Tax credits associated with dividend payments made from domestic and foreign source in-come, and equalisation taxes
• Capital allowances for industrial buildings, machinery and intangibles / tax treatment of inventories
• Real estate tax, net wealth tax and other non-profit taxes on assets
• Treatment of foreign source dividends and interest received by parent companies from EU subsidiaries; and withholding taxes on dividends and interest paid by subsidiaries in the EU to parent companies.
• Shareholder taxation in the case of SMEs
European Commission /Taxation and Customs Union
Coverage
Large enterprises
CIT domestic + cross-border effective tax rates
1998-2007 EU 25
CIT domestic + cross-border effective tax rates
2005, 2007 Bulgaria, Romania, Croatia, Turkey, Switzerland, Norway
CIT domestic + cross-border effective tax rates
2000, 2005, 2007
USA, Canada,
Japan
European Commission /Taxation and Customs Union
Coverage
Small and medium-sized enterprises
CIT domestic effective tax rates
2005, 2007 EU 25
CIT domestic effective tax rates
2005, 2007 Bulgaria, Romania, Croatia, Turkey, Switzerland, Norway
PIT domestic effective tax rates
2005, 2007 Germany, France, UK, Italy, Spain, Poland
European Commission /Taxation and Customs Union
Effective corporate tax burden (EATR) (2007) on domestic investment
0
5
10
15
20
25
30
35
40
45
0
5
10
15
20
25
30
35
40
45
EU27 EU15 EU+12 HR/TR/CH/NO JP/CA/US
EATR average
Std.dev 7.3
Std.dev 5.8
Std.dev 6.0
Std.dev 3.3
Std.dev 3.1
Maximum value
Minimum value
European Commission /Taxation and Customs Union
Effective corporate tax burden (EATR) (2007) across sources of finance and assets
0
5
10
15
20
25
30
35
EU27 EU15 EU+12
Retained earnings
New equity
Debt
Industrial buildings
Intangibles
Machinery
Financial assets
Inventories
European Commission /Taxation and Customs Union
Comparison Statutory rate and EATR (2007) on domestic investment
0
5
10
15
20
25
30
35
40
45
AustriaBelgium
BulgariaCyprus
Czech Republic
Denmark
Estonia
Finland
France
Germany
Greece
Hungary
Ireland
Italy
Lativa
Lithuania
LuxembourgMaltaNetherlandsPolandPortugal
Romania
Slovakia
Slovenia
Spain
Sweden
United Kingdom
Croatia
Norway
Switzerland
Turkey
Canada
JapanUSA
Statutory corporate tax rates
Overall mean EATR
European Commission /Taxation and Customs Union
Capital allowances across types of depreciable assets (2007 domestic investment)
0
0,1
0,2
0,3
0,4
0,5
0,6
0,7
0,8
0,9
1
AustriaBelgium
Bulgaria
Cyprus
Czech Republic
Denmark
Estonia
Finland
France
Germany
Greece
Hungary
Ireland
Italy
Latvia
Lithuania
LuxembourgMalta
NetherlandsPolandPortugal
Romania
Slovakia
Slovenia
Spain
Sweden
United Kingdom
Croatia
Norway
Switzerland
Turkey
Canada
Japan
USA
Building
Intangible
Machinery
European Commission /Taxation and Customs Union
Development of the AETR on domestic investment in the EU (1998-2007)
15
17
19
21
23
25
27
29
31
33
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
EU27
EU15
EU+12
European Commission /Taxation and Customs Union
Development of statutory rates and EATRs in the EU MS (1998-2007)
• For most EU MS the decline in EATRs is closely correlated with the decline in Statutory rates
• Some EU MS show an increase in EATRs:
Ireland: increase of corporate tax rate + real estate tax
Hungary: introduction of a solidarity tax on corporate income tax
Sweden: reduction of the deferral system (periodisation fund)
• Only 1 EU MS shows an unchanged EATR (Malta)
European Commission /Taxation and Customs Union
Findings on the development of EATRs compared to statutory rates (1998-2007)
• EATRs did not decrease to the same extent as the statutory tax rates
• The sum of rate cuts in p.p. (8.7) exceeds the sum of changes in EATR (7)
• Capital allowances remained on average stable over time, but worsened in countries with higher statutory rates
• The slower decline in EATRs as opposed to statutory tax rates on the EU level cannot be explained solely by corporate tax base broadenings through less generous capital allowances
• The main explaining factors for the trend are significant underlying tax reforms of corporate tax systems in the EU MS and the abolition of incentives
European Commission /Taxation and Customs Union
Underlying tax reforms in the EU MS(1998-2007)
• Most countries cut tax rates in several steps; large tax rate cuts in one step occurred in Austria, Belgium and Luxembourg; France, Malta and Sweden did not change the tax rate
• Few countries levy substantial non-profit taxes on corporations (no clear trend)
France: „tax professionnelle‟ on tangible fixed assets (stable)
Italy: local tax based on value-added of production (constant)
Hungary: local tax based on value-added of production (increasing)
European Commission /Taxation and Customs Union
Underlying tax reforms in the EU MS(1998-2007)
• Several countries treat interest income or investment financed with equity differently
– either resulting in a decrease of EATR for equity financing:
Italy (1998-2001): reduced rate on ordinary return (non-financial assets)/ Austria (2001-2004): reduced rate for investment in new assets
Belgium (2006 - …): ACE system
– either resulting in higher EATRs for investments in financial assets:
Germany/Spain: local taxes do not allow for full deduction of interest
Cyprus: additional tax on interest income
Ireland: higher corporate tax rate on investments in financial assets
European Commission /Taxation and Customs Union
Underlying tax reforms in the EU MS(1998-2007)
• Two countries tax(ed) retained profits differently from distributed profit:
Germany: levied a higher tax on retained earnings than on distributed profits on the corporate level (until 2000)
Estonia: profits are not taxed until they are distributed to the shareholder (as of 2000)
European Commission /Taxation and Customs Union
Effective corporate tax burden (EATR) (2007) on cross-border investment
0
10
20
30
40
50Austria
BelgiumBulgaria
Cyprus
Czech Republic
Denmark
Estonia
Finland
France
Germany
Greece
Hungary
IrelandItaly
LatviaLithuania
LuxembourgMalta
Netherlands
Poland
Portugal
Romania
Slovakia
Slovenia
Spain
Sweden
UK
CanadaJapan
USA
Domestic
Inbound
Outbound
European Commission /Taxation and Customs Union
Effective corporate tax burden (EATR) (2007) on cross-border investment
0
5
10
15
20
25
30
35
40
45
50
EATR (%)
dom
estic
inbound
outb
ound
spre
ad
inbound
spre
ad
outb
ound
EU-25
Canada
Japan
USA
European Commission /Taxation and Customs Union
Development of corporate tax burden (EATR) on cross-border investment (1998-2007)
0
5
10
15
20
25
30
35
40
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Year
EA
TR
(%
)
Inbound EU25
Outbound EU25
Inbound EU15
Outbound EU15
Inbound NMS
Outbound NMS
European Commission /Taxation and Customs Union
Effective tax burden of SMEs (2007)on domestic investment
0
5
10
15
20
25
30
35
40
45
EATR (%)
Bel
gium
Fra
nce
Ger
man
y
Hun
gary
Lith
uani
a
Luxe
mbo
urg
Net
herla
nds
Spa
in
UK
Can
ada
Japa
n
US
A
Ordinary regime
SME regime
European Commission /Taxation and Customs Union
Effective tax burden of SMEs (2007)by source of finance, on domestic investment
0
2
4
6
8
10
12
Cost of capital (%)
Belg
ium
Fra
nce
Germ
any
Hungary
Lithuania
Luxem
bourg
Neth
erlands
Spain
UK
RE - ordinary
NE - ordinary
DE - ordinary
0
2
4
6
8
10
12
Cost of capital (%)
Belg
ium
Fra
nce
Germ
any
Hungary
Lithuania
Luxem
bourg
Neth
erlands
Spain
UK
RE - SME
NE - SME
DE - SME
European Commission /Taxation and Customs Union
Effective tax burden of corporate SMEs vs partnerships (2007) on domestic investment
0
1
2
3
4
5
6
7
Cost of capital (%)
Fra
nce
Ger
man
y
Ital
y
Pol
and
Spa
in
UK
Corporations
Partnerships
European Commission /Taxation and Customs Union
Effective tax burden of corporate SMEs vs. partnerships (2007) by source of finance, on domestic
investment
0
1
2
3
4
5
6
7
8
9
Cost of capital (%)
France
Germ
any
Italy
Pola
nd
Spain
UK
RE - corporation
NE - corporation
DE - corporation
0
1
2
3
4
5
6
7
8
9
Cost of capital (%)
Fra
nce
Germ
any
Italy
Pola
nd
Spain
UK
RE - partnership
NE - partnership
DE - partnership
European Commission /Taxation and Customs Union
Sensitivity analysis
• Impact of local variation of tax levels on EATRs
important for France, Germany, Spain
due to business taxes on the local level
• Impact of the general economic assumptions
EATRs are affected
country rankings are largely unaffected
except for:
weighting of the source of finance in the case of Estonia (-)
weighting of the asset-mix can have significant effects for countries heavily targeting capital allowances to particular assets