Hong Kong and Singapore Most Attractive Places For German Investors – Large Divide Regarding Tax Burden in Asia-Pacific Region

Hong Kong and Singapore are the particularly attractive for German investors due to tax reasons. For foreign direct investments, German investors only have to shoulder an effective tax burden of 11.8 percent in Hong Kong and 17.3 percent in Singapore. However, on average, taxes are higher for German investors in the Asia/Pacific region, India and Russia than domestic investments in Germany. These are the findings of a recently published study conducted by the Centre for European Economic Research (ZEW) and the University of Oxford. The study analyses the tax burden on German and US-American direct investments in the Asia-Pacific region, India and Russia.

Research was conducted in Australia, China, Hong Kong, India, Indonesia, Japan, Cambodia, Malaysia, the Philippines, Russia, Singapore, South Korea, Taiwan, Thailand and Vietnam. A comparison of tax systems indicates that these countries in particular differ in the standard company taxation ranging from 16.5 percent in Hong Kong to 45.2 percent in India. The regulations on profit assessment and the tax type used differ in all countries. The immediate write-off in Hong Kong, the substantial capital tax in Japan, the Philippines and Russia are only some examples. From foreign investors’ perspectives, the possible extra burden due to withholding taxes also has to be taken into account. German investors consider them especially high in Taiwan, Australia and Cambodia.

The study’s analysis is more than a mere summary and description of essential regulations of company taxation in the countries surveyed. The mentioned regulations and their effect on the tax burden are quantified in a second step. The calculation of the effective tax burden is based on the internationally renowned approach by the economists Devereux and Griffith. This method allows condensing the most important regulations of a tax system to a sound benchmark. This method has already been established for comparing tax burdens in the EU and is now used for the first time in the Asia-Pacific region, India and Russia.

Hong Kong and Singapore are particularly attractive for German investors due to their effective tax burden on investments of 11.8 percent and 17.3 percent respectively. However, on average, the effective tax burden on German investments in the countries survey is 31 percent and thus exceeds the burden on domestic investments in Germany (28.1 percent). In only six out of 15 countries, the effective tax burden is below the tax burden on domestic investments in Germany. Some countries are less attractive in particularly due the amount of country specific withholding taxes. However, higher self-financing of affiliated companies can delay the extra burden due to withholding taxes and lower the effective tax burden.

Holding companies are another possibility to lower the burden of withholding taxes. From the German investors’ perspective, Hong Kong, Malaysia, Russia and Singapore are great locations for holding companies.

The majority of surveyed locations in the Asia-Pacific region, India and Russia offer various tax incentives for investments in certain economic sectors and regions. There is a huge variety of tax incentives and requirements to be met. In many cases, the effective tax burden is lowered substantially by using these incentives.

Against the background of the international tax competition and the many governments’ aim to attract foreign direct investments by attractive tax regulations, the study analyses the relation between tax burden differences and the amount of investments in the respective countries. The findings indicate that foreign direct investments are 28 percent higher in economic sectors in which there is a tax incentive.

For further information please contact

Katharina Finke, Phone: +49 (0)621/1235-397, E-mail: finke@zew.de