What Really Affects German Firms' Effective Tax Rate?

Anastasia Kraft

doi:10.5430/ijfr.v5n3p1

Abstract

This paper investigates the determinants of the effective tax rate (ETR) of German firms spanning the Germany’s Corporate Tax Reform 2008 (GTR08). This paper is the first to analyze the drivers of ETR using German longitudinal data. The results show that larger companies, growth firms, and firms with higher free cash flow (FCF) appear to have higher ETR. Leverage and operating lease expenses tend to be negatively associated with ETR. The findings show that more profitable firms appear to engage more in tax strategies that result in lower ETRs. Moreover, they indicate that multinational firms have more possibilities to reduce the tax burden, resulting in a negative association with ETR. Germany’s tax reform of 2008 has a negative effect on ETR and impacts some firm-specific factors. For more levered firms, the association between leverage and ETR is positive affected by the ETR.

Highlights

Due to globalization, tax authorities are concerned about the impact of taxes on global trade and investments, differences and interactions of domestic tax systems, which can result in aggressive tax activities of multinational firms and lead to firm’s competitive disadvantages which operate only in domestic market
Gupta & Newberry (1997) study the link between effective tax rate (ETR) and firm size as well as capital structure, asset mix, and profitability, and look at the impact of the United States Tax Reform Act of 1986 (TRA86.) Overall, the results reveal that firms with more inventory and higher profitability tend to have higher ETR, while a higher proportion of fixed assets is associated with lower ETR
In accordance with hypothesis 3 (H3), the results show a negative and significant coefficient for OL (β = -0.719, sig = 0.003), demonstrating that higher free cash flow (FCF) is positively associated with ETR (β = 0.188, sig = 0.014)

Summary

Introduction

Tax authorities are concerned about the impact of taxes on global trade and investments, differences and interactions of domestic tax systems, which can result in aggressive tax activities of multinational firms and lead to firm’s competitive disadvantages which operate only in domestic market. OECD (2013) discusses concerns of these issues in the Report on Base Erosion and Profit Shifting (BEPS) and the Action Plan on BEPS. Including these concerns, Germany’s legislation passes the Corporate Tax Reform of 2008 (GTR08). This paper analyzes the association between firm characteristics and the effective tax rate (ETR) of German firms using longitudinal data. It enriches the international empirical literature on the determinants of ETR since there is hardly any German empirical evidence on these factors. This study analyzes the effect of GTR08 on ETR and whether the tax reform impacted the relationship between firm-specific factors and ETR

Objectives

Results

Conclusion