Where is it worthwhile to invest from a tax point of view? rge Divide Regarding Tax Burden in Asia-Pacific Region - A Close Examination Pays Off

A recently conducted study by PricewaterhouseCoopers (PwC), the University of Mannheim, the Centre for European Economic Research (ZEW) and the University of Oxford analyses the tax burden on German direct investments in the Asia-Pacific region, India and Russia. Katharina Finke, who is responsible for the study at the ZEW, points out that - from a tax perspective - not all of the countries included in the survey are attractive for German investors and in many of the countries surveyed, taxes are higher for foreign investors than for comparable investments in Germany.

Katharina Finke is a researcher in the Research Department "Corporate Taxation and Public Finance" at ZEW. Her research is focused on the evaluation of corporate tax reforms as well as on the comparison of international tax burdens. Her Ph.D. project deals with policy analysis of national and international corporate tax reforms in the European Union on the basis of the ZEW Corporate Microsimulation Model (ZEW TaxCoMM).

According to the study, Hong Kong and Singapore are most attractive for investors considering taxation – why?

Finke: In Hong Kong and Singapore, the effective tax burden on German direct investments is, on average, only 11.8 percent and 17.3 percent respectively. Compared to many other countries in the Asia-Pacific region but also in comparison with Germany, this tax burden is very low. In Germany, the tax burden for a comparable investment would be 28.1 percent. In Japan and India the tax burden would even exceed 40 percent. The fact that Hong Kong and Singapore are especially attractive is due to the low level of income taxes on profits in these countries. Furthermore, very favourable write-off conditions in Hong Kong reduce the tax base. In contrast to most other countries in the Asia-Pacific region, Hong Kong and Singapore do not levy withholding taxes on dividends distributed to the parent company in Germany.

What are the reasons for the large divide regarding the tax burden in the countries surveyed?

Finke: Countries such as Malaysia, Vietnam and Russia are ranked in the middle with an effective tax burden between 23 and 29 percent. They are followed by a number of countries where the effective tax burden exceeds 30 percent. These include, for example, China and Thailand. At the bottom of the ranking are India and Japan with a tax burden of over 40 percent. These significant differences in the effective tax burden are due to the differences in the tax systems of the countries concerning income tax rates, the tax base, the levying of property taxes and withholding taxes on dividends and interest paid to the foreign parent company..

Where ranges Europe in the global tax competition?

Finke: In most Eastern European countries but also in Ireland and Cyprus the tax burden is equally low compared to Hong Kong and Singapore. However, the divide between the highest and the lowest tax burden is not as large as in the Asia-Pacific region. Even in France, where the effective tax burden is the highest in Europe, the tax burden is still significantly lower than in Japan and India.

The study shows that Germany is more attractive in terms of taxation than China. Does that mean that German companies can stay in their own country and do not have to relocate for tax reasons?

Finke:Due to the corporate tax reform introduced in 2008, which lowered the corporate tax rate from 25 to 15 percent, Germany has become more attractive as a business location. In the European tax competition but also in comparison with locations in the Asia-Pacific region, India or Russia, Germany has strengthened its position through the tax reform. Therefore, the incentives for relocations due to tax reasons are less strong than they used to be. Yet, it should be taken into account that not only tax regulations but also various other factors, such as new sales opportunities, infrastructure, essential resources or legal security, influence the attractiveness of a country for investments.