Effective Tax Burdens Research Articles

Local State Capacity and Uneven Taxation across Industrial Firms

AbstractIn this research we investigate the association between local state capacity (LSC) and effective tax burdens (ETBs) on industrial firms within counties between 1998 and 2013. The LSC measures a state's capacity for policy implementation and specifically its ability to acquire low‐cost agricultural land for nonagricultural (industrial or commercial) purposes. Based on China's government‐led development experience since the 1990s, we draw on two unique household survey datasets to capture LSC at county level. We find robust evidence that greater LSC was associated with much lower ETBs on large industrial firms. This taxation pattern implies local government's primary reliance on larger manufacturing firms, while the ETBs for small‐and‐medium enterprises are not as prominently addressed. This research highlights that LSC can affect both the amount of revenue a local government can generate and the methods it uses to collect these revenues.

Poslovne i institucionalne determinante efektivnih poreskih stopa u bankama u Republici Srbiji

The objective of the current paper is to study the influence of the selected business and institutional determinants on the annual effective tax rates in banks in the Republic of Serbia (RS). Panel data regression models are applied on 113 observations, covering the period from 2017 to 2021, where the accounting and current effective tax rates are used as a measure of the actual tax burden. The results show that the effective tax rate in banks in RS is significantly below the statutory level. Furthermore, for each data set, the coefficients of changes in the effective tax rate are calculated, and the most adequate model is selected using the Hausman and Breusch-Pagan tests. In the first model, the biggest change in the effective tax rates is caused by change in leverage, merger and aquisition processes and the bank size. The presence of loan loss provisions in the model completely highlights the impact of profitability and leverage. Finally, in the last model, banks with a profit before tax can manage effective tax rates and tax burdens by regulating capitalization levels. The results of this study are of interest for economy creators and for business managers in banks, helping them in effective tax planning and managing the results.

Tax Policies in a Transition to a Knowledge-Based Economy: The Effective Tax Burden of Companies and Highly Skilled Labour

Globalization and the fast-approaching digitalization increase capital and labour mobility which fosters tax competition among countries worldwide. Based on a unique dataset, the authors have analysed the development of effective tax burdens on corporations and highly skilled labour for 26 countries of the Organisation for Economic Co-operation and Development (OECD) over the last decade. The synthesis of both indicators allows to identify tax strategies of the considered countries and further elaborate on the scope of future tax competition in the context of current developments. Overall, the authors ascertain a declining trend in effective tax burdens on corporate investments whereas increases in the top statutory tax rates for high-income earners and a rather constant average effective tax burden on labour for a disposable income of EUR 100,000 are observed. Current developments such as the agreement on a global minimum tax or the transition to a knowledge-based economy can establish a new lower bound to tax competition on corporate investments and might shift its focus. Effective tax rates, tax competition, location attractiveness, corporate location decision, devereux/Griffith methodology, human resource tax analyser.

IP Box Regimes and Multinational Enterprises: Does Nexus Pay Off?

Over the last decades, the OECD and the European Union (EU) aimed at regulations that prevent aggressive intellectual property (IP) tax planning of multinational enterprises (MNEs). These regulations should stop the international race to the bottom of effective tax burdens. Contemporaneously, EU Member States enacted favourable tax systems for corporate research and development (R&D) activities in order to increase their location attractiveness. Especially, the output-oriented R&D tax incentives, namely IP box regimes, gained attention from a tax fraud perspective as well as popularity by national governments to generate public revenues. In this article, we qualitatively and quantitatively examine the European IP boxes. Thereby, we analyse their impact on IP tax planning and location attractiveness in light of the changes introduced by the OECD’s modified nexus approach. Our results demonstrate that even after introducing the nexus, a considerable reduction in effective average tax burdens is possible. Nonetheless, in line with the policy intention, the nexus effectively prevents excessive reductions of MNEs’ tax burden. Moreover, we account for changes in IP tax planning and observe implicit subsidies for the combination of output- and input-oriented tax incentives. Thus, these combinations reduce MNEs’ tax liabilities and finally, increase the location attractiveness in the post-nexus era.

Permanent establishment as a foreign direct investment in Poland: identification of tax barriers in the context of new tax development

Abstract The paper aims to identify the significant tax barriers to foreign direct investment (FDI) in Poland, in particular in the form of a permanent establishment (PE), in the context of new developments in international tax law. Due to the recommendations of the Base Erosion and Profit Shifting (BEPS) project, launched by Organisation for Economic Co-operation and Development (OECD) to prevent international tax avoidance, the understanding of PE has changed, which could lead to changes in business models. The purpose of the research is also to identify the significant tax barriers to economic activity in Poland, in particular in the form of PE, against the international tax law context. The study conducted by the authors relies on the most current tax rulings and judgments of administrative courts issued between 2017 and 2020. It is concluded that not so much the effective tax burdens but the regulatory ambiguity surrounding the tax obligations may contribute to the reduction of Poland's attractiveness as a location for FDI.

The Trade Policy Collision of Our Times: China’s Subsidies Encounter Abba Lerner and David Ricardo

This note takes a contrarian position on the significance of China’s subsidies, which are generally viewed as intractable and damaging to the rules-based system. It considers the implications of Lerner Symmetry for the aggregate effect of China’s subsidies and the implications of comparative advantage for the differential effects across industries, in a context where the effective differential tax burdens are unknown, as indeed is also the case with differential effects of tax and subsidy regimes in the rest of the world. It concludes that the net effect of China’s subsidies is much less than commonly supposed and that differential effects that may be damaging can be handled, as they have been in the past, through tools available under the WTO Agreement.

Breaking Borders? The European Court of Justice and Internal Market

Upon more than 400 judgements on direct taxation, the case law of the European Court of Justice has considerably shaped Member States’ tax systems. Based on Member States’ tax law adjustments in the context of four landmark rulings on corporate income taxation, we analyse whether case law is a suitable instrument to eliminate tax distortions towards the realisation of a European internal market. Our analysis is based on effective tax burdens using the Devereux/Griffith methodology. Overall, we find that due to Member States’ mostly heterogeneous adjustments and varying levels of compliance, cross-border investment continues to be discriminated in some Member States following the Marks & Spencer and National Grid Indus judgements. In addition, differences in the general availability of the rules under scrutiny and design of related provisions, cross-country differences in effective tax burdens and hence distortions to the internal market might persist. We conclude that a comprehensive harmonisation of Member States’ tax systems by way of positive integration would be necessary to sustainably eliminate tax obstacles to cross-border business activities.

The Use of SME Tax Incentives in the European Union

This paper discusses the impact and the appropriateness of tax incentives for small and medium-sized enterprises (SMEs) in the European Union. First, we provide a survey of implemented tax incentives specifically targeted at SMEs in the 28 EU Member States. Building hereon, we measure the impact of these regimes on the effective tax burdens of targeted companies. We find that SME tax incentives are a commonly used measure among European policy makers. The vast majority of regimes, however, only marginally reduce the tax liability of SMEs. If major reliefs are available, they mostly stem from special tax rates whereas tax credits and special allowance play a minor role. In the second main part of the analysis, we examine the arguments potentially justifying the usage of SME tax incentives. As a main result, small firms per se do not create more jobs and innovations nor do they face insurmountable financing constraints. The existence of market failures commonly associated with SMEs – and possibly warranting the use of SME tax incentives – can therefore not be confirmed. Instead, disproportionate tax compliance costs for small entities constitute the most compelling argument for a special tax treatment. These compliance costs can most appropriately be addressed by administrative reliefs. Special tax rates, tax credits and allowances, in contrast, are not only inefficient but also ineffective in this regard. Instead of improving the neutrality of the overall tax system, the latter are likely to add further distortions and unnecessary complexity. Altogether, the focus of policy - makers should thus shift from providing discriminatory incentives to the design of a generally neutral and simple tax system, which would benefit small as well as large enterprises.

Taxing Multinationals ‘Post-BEPS’ – What’s Next?

textabstractThe taxation of multinational companies has been attracting a great deal of attention in recent years. Com- pany tax planning and country tax competition have increasingly been questioned, by the general public, media, in politics and academia. Countries compete for investment, reducing tax burdens on profits. Multinationals respond, shifting profit for tax purposes to low- tax jurisdictions by legally arranging their business affairs in a certain way to optimise their effective corporation tax burdens. Globalisation speeds-up matters. The company taxation models that countries apply today originated in the 1920s. These models were of course designed to cater for interbellum societal, political, economic and business realities, and hence no longer seem ‘fit -for -purpose’ in today’s globalised market place. Corporate tax systems are antique and now appear to be failing, in consequence putting fiscal systems under pressure. The OECD has estimated missed corporate tax revenues at a staggering 1⁄4 of a trillion US dollars a year. To balance budgets, countries resorted to raising tax burdens on consumption and labour. Economic and financial crises that we now seem to have overcome have exacerbated matters, affecting societal trust in the integrity of the tax system. The general pub- lic considers tax bill increases unfair if they are not addressed to multinationals, but imposed on their work- ers and customers instead. It is often heard that moral obligations to finance expenditure apply equally to multinationals.

Taxing Investments in the Asia-Pacific Region: The Importance of Cross-Border Taxation and Fiscal Incentives

This article investigates the taxation of investments in the Asia-Pacific region. The authors’ analysis is based on the methodology of Devereux and Griffith (1999 and 2003) for determining effective average tax rates. This approach allows us to account for important domestic and international tax regulations. The results presented in this article show that for the tax law of 2014, the overall dispersion of effective tax burdens in the Asia-Pacific region ranges from 10.6% in Hong Kong to 40.4% in India for domestic investments (an overall average of 23.4%). In 8 out of 19 jurisdictions covered, investments are, however, effectively taxed at a rate between 20% and 25%. For foreign direct investment, international tax law regulations have a significant impact on the overall tax burden. In any of the Asia-Pacific jurisdictions, foreign direct investments by a Singaporean or a German parent company are on average taxed at 29.2% and at 32.8% in the case of profit repatriation to the United States. Meanwhile, tax incentives for the stimulation of private investment reduce the effective average tax rate by 8.6 percentage points on average. Fiscal incentives targeted at investments in the high-technology sector or the development of specific geographic areas result in the lowest effective tax burdens.

Tax Havens and Effective Tax Rates: An Analysis of Private versus Public European Firms

We examine the impact of tax haven operations on the effective corporate tax burdens of publicly listed and privately held firms domiciled in Europe. In particular, we consider how European firms' tax haven operations interact with factors such as listing status and home-country tax reporting systems to determine the relative tax burdens of publicly listed and private firms. Our main empirical results show that tax haven operations are associated with lower effective tax rates for both private and public firms, and that the impact of tax havens in lowering effective tax rates is more pronounced for private firms than for public firms. Home country characteristics are also important determinants of effective tax rates for both private and public firms with tax havens. Given that firms use tax havens as tax avoidance mechanism in lowering tax burdens regardless of their listing status, regulatory and tax enforcement bodies should focus on private as well as public firms.

Taxing Investments in the Asia-Pacific Region: The Importance of Cross-Border Taxation and Tax Incentives

This paper investigates the taxation of investments in the Asia-Pacific region. Our analysis is based on the methodology of Devereux and Griffith (1999, 2003) for determining effective average tax rates. This approach allows us to account for important national and international tax regulations. Our results show that the overall dispersion of effective tax burdens in Asia-Pacific ranges from 10.6% in Hong Kong to 40.4% in India for domestic investments (overall average of 23.4%). In 8 out of 19 jurisdictions covered, investments are, however, effectively taxed at a rate between 20% and 25%. If the investment is made by a foreign investor, cross-border taxation has a significant impact on the overall tax burden. In any of the Asia-Pacific jurisdictions, foreign direct investments by a Singaporean or a German parent company are on average taxed at 29.2% and at 32.8% in case of a US investor. Meanwhile, tax incentives for the stimulation of private investment reduce the effective average tax rate by 8.6 percentage points on average. Fiscal incentives targeted at investments in the high technology sector or the development of specific geographic areas result in the lowest effective tax burdens.

A Note on Voting over Taxes with Tax Avoidance

We study majority voting over taxes when tax avoidance is possible, focusing on the progressivity of effective tax burdens and how government policy can affect it. We show that: (1) whether effective tax burdens are progressive or not depends on the distribution of individuals' pre-tax income, the per capita government revenue requirement, and the government enforcement level; and (2) both a lower per capita government revenue requirement and a higher government enforcement level can help ensure that effective tax burdens are progressive.

Corporate Taxation Trends in Europe

This article assesses the development of effective tax burdens on domestic and cross-border investments across EU Member States for the period from 1998 to 2012. The article summarizes the main results of ongoing research carried out on behalf of the European Commission. The results help to evaluate corporate taxation trends within the EU since it identifies the most relevant tax drivers. We show a reduction of effective tax burdens on domestic investments and an increasing application of the exemption method on cross-border investments over time. Both findings indicate increasing tax competition among EU Member States.

Reduction of the effective corporate tax burden in Romania 1992–2012 and Romania's current ranking among the Central and Eastern European EU member states

This article traces Romania's development to a low-tax country among the member states of the European Union by analysing the major tax law changes in corporate taxation since 1992. We compute and compare the effective company tax burdens of a European model company at different points of time which constitute milestones in the development of corporate taxation in Romania. We find that the significant reduction of the corporate income tax rate from 45% in 1992 to 16% since 2005 has not been accompanied by a comprehensive broadening of the corporate income tax base as it has been in many longstanding member states of the EU and the OECD. Since 1992 the average company tax burden of the underlying model company has dropped by almost 65%. As a result, Romania holds second position among the group of Central and Eastern European EU member states.

Taxation of Married Couples in Germany and the UK: One-Earner Couples Make the Difference

A large body of literature points out that joint taxation of married couples with full income splitting (Ehegattensplitting) is an important reason for the relatively low labor force participation of married women in Germany. This paper investigates the relative gains of joint taxation for married couples by comparing effective tax burdens for three groups of tax units between Germany and the UK. Using the tax and benefit microsimulation model, EUROMOD, we compare effective average income tax rates for singles, one-earner couples, and two-earner couples in Germany and the UK. Applying the concept of effective tax rates, we go beyond marginal tax rates and account for effects of tax allowances and tax exemptions. We find that effective income tax liabilities are significantly lower for the majority of tax units in Germany compared to the UK, in particular for married couples. This is because married couples are taxed

Tax Burden on Foreign Direct Investments in the Asia-Pacific Region, India, and Russia

This article describes the tax regimes for corporations in the Asia-Pacific Region, India, and Russia and assesses the effective tax burden on domestic and cross-border investments of German and US-American investors. The calculation of effective tax burdens is based on the renowned methodology of Devereux/Griffith. This approach allows condensing the most relevant provisions of tax regimes into a broadly accepted tax burden measure. The results help evaluate the attractiveness of the respective investment locations from a tax perspective and identify the most relevant tax drivers.

Saver's Choice: Comparing the Marginal Effective Tax Burdens on RRSPs and TFSAs

Canada’s graduated personal income tax leads most taxpayers to expect higher tax rates when they are working than when they are living on lower incomes from their retirement savings. Yet for many people, marginal effective tax rates on income from retirement savings are higher than those they face during working life. Comparing marginal effective tax rates across income levels suggests that many Canadians with savings in tax-deferred vehicles, like Registered Retirement Savings Plans, should put more future saving in tax-prepaid savings plans, particularly Tax Free Savings Accounts.

Common Corporate Tax Base and Effective Tax Burdens in the EU Member States

This article assesses the impact of a Common Corporate Tax Base (CCTB) as promoted by the European Commission and the related working groups on the effective tax burdens of companies in all 27 EU Member States. The results shall help to evaluate the economic consequences of introducing a harmonized set of tax accounting rules for EU-based companies. The proposals for a CCTB covered here include depreciation on intangibles, machinery, buildings, furniture and fixtures, simplified valuation of inventories, determination of production costs for stocks, treatment of costs for R&D as part of production costs, provisions for future pension payments, provisions for legal obligations, avoidance of double taxation regarding dividend income, and loss relief. The proposed options for a CCTB are applied to average EU-27 corporations of different sizes, as well as to model companies belonging to different economic sectors.

Property taxes and elderly mobility

The 2000–2005 housing market boom in the U.S. has caused sharp increases in residential property taxes. Housing-rich but income-poor elderly homeowners often complain about rising tax burdens, and anecdotal evidence suggests that some move to reduce their tax burden. There has been little systematic analysis, however, of the link between property tax levels and the mobility rate of elderly homeowners. This paper investigates this link using household-level panel data from the Health and Retirement Study (HRS) and a newly collected data set on state-provided property tax relief programs. These relief programs generate variation in effective property tax burdens that is not due solely to arguably endogenous local community choices about taxes and expenditure programs. The findings provide evidence suggesting that higher property taxes raise mobility among elderly homeowners. The point estimates from instrumental variable estimation using relief programs to generate instruments suggest that a $100 increase in annual property taxes is associated with a 0.73 percentage point increase in the 2-year mobility rate for homeowners over the age of 50. This is an 8 percent increase from the baseline 2-year mobility rate of 9 percent. These results are robust to alternative specifications.