Digital Tax Index 2017: Germany Lagging Behind in International Rankings

As the process of digitalisation advances at a rapid rate all over the world, how attractive a location is for investments in digital business models depends on the tax framework of the country in question. While other indices assessing a country’s digital attractiveness neglect taxes as a location factor, the study „Digital Tax Index 2017: Locational Tax Attractiveness for Digital Business Models“ carried out by the Centre for European Economic Research (ZEW), Mannheim, in cooperation with the University of Mannheim and the accountancy and consulting firm PricewaterhouseCoopers (PwC) now delivers a measure to assess the tax attractiveness of countries for investing in digital business models. In an international comparison, Germany has a lot of catching up to do in this arena. This is the main finding of the recent study of the tax frameworks of 33 different countries.

For their analysis, the authors of the study compared the tax frameworks of the EU-28 as well as the US, Japan, Canada, Norway and Switzerland based on the respective tax base, effective average tax rate and cost of capital. What became clear was that tax conditions vary greatly from country to country. For instance, among the countries analysed as part of the study, the effective average tax rate ranges from minus ten to plus 25 per cent. Ireland, Italy and Hungary prove to be particularly attractive locations for investments in digital business models, whereas Germany comes in third from last place with an effective average tax rate of 23 per cent. Only the US and Japan appear less attractive for investments in digital business models.

Regarding the cost of capital as a measure of a location's attractiveness for expanding the volume of investment, there is also great international variation from minus four to plus six per cent. With respect to the cost of capital, the most favourable conditions for investors were found in Italy, France and Hungary. Germany, meanwhile, comes in at number 28 out of 33 countries with capital costs of roughly five per cent.

R&D incentives can encourage investment

„A country's ranking on the Digital Tax Index largely depends on special incentives such as favourable depreciation rules or so-called patent boxes," says ZEW research associate Professor Christoph Spengel. „In some countries investing in digital business models is even more profitable after tax than before. In other words, these investments are subsidised through the tax framework."

Another important influence on a country's ranking are tax incentives for research and development (R&D). R&D incentives can encourage firms to invest in digital innovation in a particular location, giving themselves an advantage over international competitors. Compared to countries such as Ireland or France, who are actively involved in providing R&D incentives as well as patent boxes, Germany is falling behind on the global stage. Overall, countries with little or no tax incentives rank lowest in the Digital Tax Index 2017.

For further information please contact:

Prof. Dr. Christoph Spengel, Phone +49(0)621/181-1704, E-mail spengel@uni-mannheim.de

Prof. Dr. Katharina Nicolay, Phone +49(0)621/1235-397, E-mail nicolay@zew.de