EU Comparison Reveals Peak Load for Germany

Germany burdens its corporations' profits as highly as no other country in the European Union, except for Spain. The tax-specific disadvantage to Germany as a business location has increased in the past years: Whereas in Germany tax reduction is so far merely being debated, action has been taken in several other EU states such as Austria, Denmark or the Netherlands.

This is shown by a calculation of the effective tax burdens of firms in the European Union for the year 2005 carried out by the Centre for European Economic Research (ZEW) Mannheim, Germany.

According to this, Germany effectively burdens corporate profits at 36 percent. The average rate of the other EU states amounts to 23.7 percent. Even when the relative tax havens represented by the new member states are disregarded, the need for action is clearly evident: Locations such as Austria or Scandinavia meanwhile beat Germany with respect to corporate taxation by more than ten percent (see Figure). Results of an analysis by the ZEW, commissioned by BAK Basel Economics, also confirm the unfavourable position of Germany when compared to other sites outside the EU including Switzerland. Thus, large tax-specific incentives to relocate firms or profits are presented. The losses from this German passivity are borne by the German business location and most of all by the German tax authorities: With differences in tax burdens at this level, multinational firms will by any legal means seek to tax their profits outside of German borders. "The findings show that Germany is not to delay its intended reform of corporate taxation", comments Friedrich Heinemann, head of the ZEW research department Corporate Taxation and Public Finance.

The effective tax rates calculated by the ZEW are a comprehensive measurement index (see: "On the Method: The Effective Average Tax Rate"). The calculations take into account all relevant income and capital taxes of the respective country. A profitable investment by a firm is thereby devised as the model. Next to the respective tax rates the estimation also considers the most important rules concerning the definition of tax bases such as, for example, valuation rules.

On the Method: The Effective Average Tax Rate (EATR)

The effective average tax rate (EATR) reflects the percentage cut on the return of a model investment project incurred by taxation. The calculation is based on the approach by Devereux/Griffith and, next to all tax rates, also takes into account tax base definitions including, for example, depreciation rules. The presumed model investment comprises at equal shares machinery, industrial buildings, patents, financial assets, and inventories. The model investment is carried out by a firm in the legal form of a limited liability company and by assumption returns a profit before taxes of 20 percent. Financing is distributed at balanced weights among retained profits, issuance of new shares as well as credit capital.

Subtly differentiated comparisons of regional tax burdens including Swiss cantons were carried through by the ZEW within the IBC Taxation Index, commissioned by BAK Basel Economics. You can get the study here.

Contact

PD Dr. Friedrich Heinemann, Phone: +49/621/1235-149, E-mail: heinemann@zew.de

Michael Overesch, E-mail: overesch@zew.de