Corporate tax index
Tax index provides transparency
Where do German firms like to set up foreign subsidiaries and how attractive is Germany itself as a location for international companies? The Tax Attractiveness Index provides a comparative analysis of taxation regimes in 100 countries.
With respect to its levels of corporate tax Germany occupies a middle position in the international table, as the new Tax Attractiveness Index (T.A.X.) shows. The T.A.X. was compiled by Professor Deborah Schanz, Director of the Institute for Business Taxation and Tax Law at LMU. The T.A.X. is based on an analysis of 20 components of corporate tax policies, including taxation of dividends and the rate of capital gains tax, and currently lists data for 100 countries. “The Index allows one to compare the attractiveness of countries for international corporations regarding the regulations governing business taxation in each of these countries. Attractiveness in this context, however, is not simply determined by the rate of corporate taxation per se. Some countries – such as Malta or the Netherlands – in which the tax rate is relatively high may nevertheless be attractive to firms from elsewhere. “That’s why we decided to base the Index on a composite set of 20 different indicators that are relevant to the calculations made by international businesses,” says Schanz.
According to the current version of theT.A.X., the Bahamas represent the most favorable tax domicile for international firms. Ireland, which hosts Google’s European headquarters, takes the 17th slot, Germany is ranked 38th, Panama 61st, and the USA is close to the bottom, in 95th place. Needless to say, the Index is not intended to serve – nor can it be used – as a guide to tax evasion. “The Index attempts to reduce complexity. Due to simplification it is of little use to companies that are solely on the lookout for useful tax loopholes,” says Jil Fritz, a doctoral student at the Institute.
The Tax Attractiveness Index is regularly updated and can be accessed on the internet at www.taxindex.de. The data on which it is based are drawn from official yearbooks published by national and international institutions. Schanz and her team have so far worked through the editions of these publications that appeared between the periods of 2005 and 2014, and amendments to the relevant tax laws are constantly being incorporated into their database. “The website brings selected categories of data together in an Index for the first time, and makes them available in a convenient and interactive online form which provides various search options. The Index thus combines information that has, up to now, been scattered in the pages of a range of different published sources,” says Jil Fritz. The site enables users to view either the entire ranking or to focus selectively on particular types of data. In the future a download option will be made available for research purposes.
As Deborah Schanz shows in a recent paper in the “Review of Managerial Science”, the T.A.X. provides insight into the factors that determine where German firms decide to set up foreign subsidiaries. “We found that the presence of a favorable tax environment in a country does have a significant positive impact on the number of subsidiaries of German companies settled down there,” says Schanz. German concerns that are globally active tend to select locations outside the EU, and within Europe itself the most favored countries are the Netherlands, Belgium, Austria and Switzerland, all of which are ranked in the top one-third of theT.A.X.. “Governments should take note of the fact that multinational firms do not focus solely on the rate of corporate taxation, but also take other factors into account in deciding where to site their international offshoots,” Schanz says. The study also reveals that the German companies listed in the DAX30 have set up very few subsidiaries in Panama. “This clearly demonstrates that firms with real business interests and legitimate economic structures are not implicated in the affairs revealed by the Panama Papers. In terms of its taxation of company profits, Panama ranks at the lower end of the mid-range, as our Index shows,” Deborah Schanz points out.
Various initiatives are now underway that aim to close the plethora of loopholes available to international concerns under the present global system of business taxation. The EU Commission, for example, plans to improve the exchange of information between the national tax authorities in its member States. According to the Organization for Economic Cooperation and Development (OECD), business concerns annually save an estimated 100 to 240 billion dollars in corporate tax by shifting profits into jurisdictions with the most favorable taxation regimes. Social media giant Facebook, for instance, paid only ₤4327 sterling in corporation tax in the UK – its second largest market – in 2014.