Report on Effective Tax Rates Has Severe Shortcomings in Terms of Methodology and Content

The ZEW – Leibniz Centre for European Economic Research in Mannheim, in cooperation with the University of Mannheim, has put the recently published report commissioned by the Greens in the European Parliament under scrutiny and identified serious methodological shortcomings in the investigations. The researchers from ZEW and the University of Mannheim have found that the conclusions drawn in the report concerning the demand for greater tax transparency are ungrounded.

ZEW, in cooperation with the University of Mannheim, has been calculating effective tax burdens on behalf of the European Commission for many years.

The authors of the study failed to make a clear distinction between profits in companies’ balance sheets and the underlying tax base, thus wrongly basing their calculations on balance sheet data.

According to Professor Christoph Spengel, ZEW Research Associate and Chair of Business Administration and Taxation II at the University of Mannheim, “there is always a divergence between commercial and taxable profits due to non-deductible expenses and tax-free income. In addition, many countries openly and legitimately tax license revenues at a very low rate.”

Within the European Union, it is also mandatory to exempt dividends distributed within a multinational in order to prevent double taxation of income, a fact that has been completely neglected in the study commissioned by the Greens in the EU Parliament.

Simplification leads to distortion of results

In the study, the effective tax burden is determined by simply calculating the ratio of total tax payments to total income within a country. “Instead of using the approach in the study, it would be advisable to first determine the effective tax rate of a company and then calculate the average of all effective tax rates,” says Christoph Spengel. This simplification leads to a considerable distortion of the results.

Finally, the study period ends in 2015, thus not taking into account the many reform measures that have been implemented since then. Christoph Spengel concludes: “Before taking further legislative steps, European tax policymakers would be well-advised to first evaluate the measures taken since 2016 using appropriate methods. Otherwise, Europe runs the risk of suffering lasting damage in terms of its tax attractiveness as a result of ill-advised policy decisions.”