Measuring Tax Attractiveness Across Countries

Abstract

This paper develops a new tax measure - the Tax Attractiveness Index - reflecting the attractiveness of a country's tax environment and the tax planning opportuni- ties that are offered. Specifically, the Tax Attractiveness Index covers 16 different compo- nents of real-world tax systems, such as the statutory tax rate, the taxation of dividends and capital gains, withholding taxes, the existence of a group taxation regime, loss offset provi- sion, the double tax treaty network, thin capitalization rules, and controlled foreign compa- ny (CFC) rules. We develop methods to quantify each tax factor. The Tax Attractiveness Index is constructed for 100 countries over the 2005 to 2009 period. Regional clusters in the index as well as in the application of certain tax rules can be observed. The evaluation of individual countries based on the index corresponds - but is not totally identical - with the OECD's 'black' respectively 'grey' list. By comparing the Tax Attractiveness Index with the statutory tax rate, we reveal that even high tax countries offer favorable tax condi- tions. Hence, the statutory tax rate is not a suitable proxy for a country's tax climate in any case since countries may set other incentives to attract firms and investments.