The relationship between the effective tax rate and the nominal rate

Paulo Jorge Varela Lopes Dias,Pedro Miguel Gomes Reis

doi:10.22201/fca.24488410e.2018.1609

Paulo Jorge Varela Lopes Dias, Pedro Miguel Gomes Reis

Open Access

https://doi.org/10.22201/fca.24488410e.2018.1609

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Abstract

<p class="Pa7">The main goal of this investigation is to understand the relationship between the nominal rate and the effective tax rate and to evaluate if the differences between them depend on the value of the nominal rate. Based on a sample of 1,530 companies from 5 countries members of the European Union (Denmark, Slovenia, Finland, Luxembourg and the United Kingdom) there’s evidence that the effective tax rate is positively related to the nominal rate. The effective tax rate was calculated through the ratio between the value of the tax paid over the result before tax. When the nominal tax rate increases, the effective rate increases equally but with a slower growth. This relationship is softened if we take into account the value of the nominal tax rate, which shows that companies have the ability to manage the results in order to increase savings in tax.</p>

Highlights

Several studies have shown that the nominal tax rate and the effective tax rate over the profit of companies has been decreasing over the years
Out of the countries of the sample, Slovenia is the country with the lowest nominal rate throughout the 3 years with an average rate of 17.33% during the analysed period of time, as opposing to Luxembourg which represents the highest rate of all 5 countries, with an average of 29.07% which can be seen on Table 4
As Dyreng et al, (2014) or Slemrod (2004) had already identified, we observe that the average ETR has significantly decreased in this period, which may result on the drop of the nominal rates of the majority of these countries presented on table 4

Summary

Introduction

Several studies have shown that the nominal tax rate and the effective tax rate over the profit of companies has been decreasing over the years. The final sample had a total of 1530 companies of 5 different countries, Denmark, Slovenia, Finland, Luxemburg and the United Kingdom. It was created a model based on the study of Adhikari et al (2006), in order to study the relationship between the effective tax rate and the nominal rate. According to the results obtained, evidence was found for the existence of a positive relationship between the effective tax rate and the nominal rate, even if there was a coefficient inferior to one, which demonstrates that the companies have the ability to manage their results in order to be able to pay less tax

Literature review

Elimination of outliers

Results

Conclusion and discussion