Tax Competition Weakened, Bureaucracy on the Rise

Family businesses are typically firmly rooted in their home markets. As a result, they do not have the ability to optimise their tax payments as cleverly as, for example, large corporations. They are also more exposed to complex regulations meant to reduce tax competition. ZEW Research Associate Professor Christoph Spengel, together with economists from ZEW Mannheim, examined this relationship for the second time since 2018 on behalf of the Foundation for Family Businesses. Their study demonstrates that tax competition has weakened in recent years, and that certain instruments are effective against profit-shifting efforts.

So far, however, this has not led to tax rates harmonising at a lower level. “Family businesses in Germany still bear a high tax burden. This creates incentive for them to invest in locations with more appealing tax policies. The incentive also applies for their increasingly mobile employees, who may seek to move to favourable tax locations,” explains Spengel. Moreover, the tax harmonisation efforts of the international community through measures such as the Anti-Tax Avoidance Directive (ATAD), the Country-by-Country Reporting (CbCR), or the Pillar Two model rules from the OECD lead to a rise in bureaucratic red tape.