Corporate tax: Understand tax competition in Europe

Fiscalité des entreprises

Taxes are the lever used by states to improve economic competitiveness and attract investment. The beneficial rates offered by some countries, sometimes referred to as “tax bases,” are attacked by neighbors who are more willing to pay taxes on profits. How does this tax competition work in Europe?

Given the many complex factors to consider, it is difficult to know how much governments actually take from corporate profits – Attribution: atiatiati / iStock

In Europe, as in other parts of the world, tax competition is fierce. As the flow of capital, goods, and services is gradually liberalized, some states may want to enforce quality tax laws in order to attract companies to their territory.

Reduction in corporate tax rates

In the coming decades, this trend will be lower in corporate taxation. Of the 109 jurisdictions analyzedOECD, Legal corporate tax rate 20.6% Average in 2020 compared 28% 20 years ago. In Europe,Germany And Bulgaria For example, their legal rate was significantly reduced by more than 20 percent between 2000 and 2020.

The Legal rate of corporate income tax, Which corresponds to the nominal rate at which companies are subject, however, does not allow an accurate knowledge of the tax system that attributes to a state: the extent or specificity of the base at which this rate applies and may give priority rates to certain economic sectors.

This is the reason Average effective tax rate OECD estimates (TIEM) are preferred here. This indicator “Calculates the average tax a company pays as part of an investment plan that generates good financial returns”, Refers to the international organization.

In countries containing OECD data, the effective rate 20.1% Average in 2019: The difference in the average tax rate (21.4%) is 1.3 points, but it is much larger in some countries. In general, a comparison of the two indicators shows that tax breaks are more generous if legal rates are higher.

The FranceIt has the highest average effective rate in Europe (30.3% in 2019)the aim Gradually reduce its legal rate to 25% for company profits above 38 38,120. This can reach up to 33% before.

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On the other hand, Gucci, Jersey AndThe Island of Man, The autonomous regions of the United Kingdom, reduced their rate to 0% in 2009. 10% below the symbolic bar,Andorra. It did not have a corporate tax system, but in 2012 adopted a general corporate tax system. However, the principality has also established preferential jewelry that allows companies to pay less than the 8.9 percent shown in the graph.

However, the average effective rate presented here has its own limitations: it is used in theory and in the general cases of a company’s investment and in the return on this investment. In addition, it does not take into account incentives for research and development (R&D) and the imposition of taxes on intellectual property (brands, patents, etc.), which is often more profitable for companies. So a comparison based on these data on effective tax rates offers the first review of the state of tax competition in Europe, but not all of them are adequate.

Other indicators make it possible to find out whether a state has implemented particularly beneficial tax systems: especially when it comes to investments made by foreign companies there. “Countries such as Ireland and Luxembourg are targets for foreign investment (FDI).”, Notable in 2018 by Gillum Allegri and Julian Pellefig OFCE Review. This domestic FDI represents 338% of GDP Ireland, From 356% Netherlands And 856% Luxembourg In 2020, France and Finland will have 32% and 31%, respectively. This indicates that the first three countries have special mechanisms to attract investment.

Reduce the tax base and tax packages

In addition to the general reduction in tax rates presented above, Reducing the tax base Companies usually pay lower taxes and some countries use it to attract activities and generally use the profits of these companies.

Liked by many countriesIreland Thus companies made their low tax rate an important component of their economic policy. With a 12% rate and specific tax deals, Emerald Islands has been able to attract multinationals such as Google, Facebook and Intel to its soil. Many companies have taken advantage of legal loopholes in Irish law to significantly reduce taxes. For example, Google “Double Irish”, An arrangement between the United States, Ireland and Bermuda does not allow taxes to be paid in Europe. But the country, under international pressure, has banned some tax optimization schemes.

The Indeterminate assetLike property, property is taxed differently from other profits in many countries, allowing a business to reduce its tax base. “This is what Apple did. The group transferred their property ownership to Ireland, where they made huge profits.”, Explained recently Echo James Stewart, professor at Trinity Business School. With the digitization of the economy, a growing number of companies are relying on these invisible assets: for tax optimization, algorithms, trademarks or patents can be found within favorable tax-imposing states.

Many states have set up “patent boxes” offering tax deductions for income from patents or software. Malta In 2019, a difference of 30 points was recorded between legal rates (approximately 35%) and intellectual property rights (5%). While the average effective rate is the highest in Europe, an imputation system allows investors to repay a large portion of their tax, which significantly reduces the island nation’s actual tax.

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The Tax credits It also allows certain expenses, such as research and development (R&D) expenses, to be deducted from the tax base. In France, Research tax credit allows companies investing in research and development to benefit from substantial returns on their expenses. In 2019, 30 of the 36 OECD member states offered tax incentives for innovation and research development.

apart from, Priority agreements (Tax Rules) The one-off agreement between multinational corporations and some administrations allows some states to reduce corporate taxes. The Luxembourg For example, between 2006 and 2014, Amazon was allowed to evade corporate taxes.

Finally, some countries like it Belgium, l ‘Italy, The Poland Where Portugal, Implemented tax deductions on company equity. The Belgium Thus the highest legal rate (approximately 30%) in 2019, but the effective rate (23%).

On the part of the largest companies, many levers are used to transfer profits from one country to another. According to one Report These tools of the 2020 CPO “Are usually compiled“Through Multinational Companies”Include intragroup debt and transfer prices, with no change in the location of the actual operations [prix des transactions entre sociétés d’un même groupe et résidentes d’États différents NDLR] And location of invisible assets (e.g. brands or patents)”.

In addition, tax is not the only factor that determines a company’s permanent residence in a country: the cost of energy and energy, the quality of real estate, employment, infrastructure, transportation and telecommunications, the administrative and legal stability, and the existence of manufacturing or research centers.

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