Frank Streif

Fiscal Rules and Compliance Expectations – Evidence for the German Debt Brake

Fiscal rules have become popular to limit deficits and high debt burdens in industrialized countries. A growing literature examines their impact based on aggregate fiscal performance. So far, no evidence exists on how fiscal rules influence deficit expectations of fiscal policy makers. In the context of the German debt brake, we study this expectation dimension. In a first step, we introduce a simple dynamic model in an environment characterized by the lagged implementation of a new rule. Lagged implementation characterizes the setup of the German debt brake and raises credibility issues. In a second step, we analyze a unique survey of members of all 16 German state parliaments and show that the debt brake’s credibility is far from perfect. The heterogeneity of compliance expectations in the survey closely corresponds to our theoretical predictions regarding states’ initial fiscal conditions, specific state fiscal rules and bailout perceptions. In addition, there is a robust asymmetry in compliance expectations between insiders and outsiders (both for in-state vs out-of-state politicians and the government vs opposition dimension), which we attribute to overconfidence rather than noisy information. These results suggest that national fiscal rules can be strengthened through nobailout rules, sustainable initial fiscal conditions and complementary sub-national rules.

Föderalismus-Präferenzen in den deutschen Landesparlamenten

This study describes the results of a survey conducted in all sixteen German state parliaments on federal preferences and expectations of the members of state parliaments. With respect to the constitutional debt brake the results indicate that many states are not expected to respect the zero deficit rule which holds from the year 2020 onwards. A remarkable asymmetry emerges between the self-assessment of a state and the assessment from outside. Today’s equalization intensity is regarded as generous but has a strong backing in the state parliaments. Views on larger tax autonomy are controversial. Heterogeneity of answers is visibly related to the financial capacity of states while party membership is rather correlated with tax autonomy than with debt brake preferences. Overall, the survey results indicate that, in spite of the debt brake, not all members of state parliaments are fully convinced of a hard budget constraint for the states. Moreover, this survey evidence points to a strong inertia of the federal status quo with respect to equalization and revenue competencies. Friedrich Heinemann: ZEW, L7,1, 68161Mannheim, Deutschland, E-Mail: heinemann@zew.de Eckhard Janeba: Universität Mannheim, Abteilung Volkswirtschaftslehre, L7,3-5, 68131Mannheim, Deutschland, E-Mail: janeba@uni-mannheim.de Marc-Daniel Moessinger: ZEW, L7,1, 68161Mannheim, Deutschland, E-Mail: moessinger@zew.de Christoph Schröder: ZEW, L7,1, 68161Mannheim, Deutschland, E-Mail: christoph.schroeder@zew.de Frank Streif: ZEW, L7,1, 68161Mannheim, Deutschland, E-Mail: streif@zew.de

Decline of Controlled Foreign Company Rules and Rise of Intellectual Property Boxes: How the European Court of Justice Affects Tax Competition and Economic Distortions in Europe†

The European Court of Justice (ECJ) has become an influential player in the field of direct taxation in the European Union (EU) in the past 20 years. However, it is unclear whether or not the ECJs decisions and the corresponding reactions by the member states actually contribute to tax neutrality in economic terms and, therefore, to the achievement of the internal market. In 2006, the ECJ limited the applicability of specific tax rules in the EU that are intended to prohibit the excessive use of low-tax countries by multinationals. Our counterfactual analysis shows that the courts restriction of so-called controlled foreign company rules and the related second-round reactions by some member states – i.e. the introduction of low-tax regimes for income from acquired intellectual properties (IP boxes for acquired IP) – cast doubt on the seemingly positive effects the ECJ has on reducing tax distortions. In addition, we demonstrate that the restricted applicability of IP boxes as endorsed by the OECD and the European Commission would strengthen tax neutrality in Europe.

Decline of CFC Rules and Rise of IP Boxes: How the European Court of Justice Affects Tax Competition and Economic Distortions in Europe

The European Court of Justice (ECJ) has become an influential player in the field of direct taxation in the European Union (EU) in the past 20 years. However, it is unclear whether or not the ECJs decisions and the corresponding reactions by the member states actually contribute to tax neutrality in economic terms and, therefore, to the achievement of the internal market. In 2006, the ECJ limited the applicability of specific tax rules in the EU that are intended to prohibit the excessive use of low-tax countries by multinationals. Our counterfactual analysis shows that the courts restriction of so-called controlled foreign company rules and the related second-round reactions by some member states – i.e. the introduction of low-tax regimes for income from acquired intellectual properties (IP boxes for acquired IP) – cast doubt on the seemingly positive effects the ECJ has on reducing tax distortions. In addition, we demonstrate that the restricted applicability of IP boxes as endorsed by the OECD and the European Commission would strengthen tax neutrality in Europe.

The impact of tax planning on forward-looking effective tax rates

[Introduction] The tax planning strategies of multinational corporations have been a key issue on the international policy agenda for some years now. Both the European Commission and the OECD are currently working on anti-avoidance measures to curb international profit shifting of multinational companies. These initiatives against so-called aggressive tax planning have mainly been pushed by anecdotal evidence on tax avoidance strategies of some of the currently most valuable and fast growing multinational companies such as Google, Apple, and Ikea. These companies use tax planning structures reducing the effective tax burden on foreign income to close to zero. In addition to this anecdotal evidence, there is empirical evidence on profit shifting activities of multinational companies. Several studies suggest that both pre-tax profits and leverage are sensitive to statutory tax rate differentials. The purpose of this study is to provide a more general insight into the impact of representative tax planning strategies on forward-looking effective tax rates considering cross-border investments between the EU member states and the US. We thereby complement the report on aggressive tax planning structures by Ramboll Management Consulting and Corit Advisory prepared for the European Commission with information on the actual tax saving effects of typical tax planning strategies. As in the annually updated report on effective tax rates conducted by ZEW, we apply the Devereux/Griffith model to calculate cost of capital (CoC) and effective average tax rates (EATR). This allows us to compare the results for different tax planning structures to the results for direct cross-border investments known from the annual updates. The report is structured as follows: In Section 2, we briefly describe the Devereux/Griffith model applied in this study to compute CoC and EATR. We also list the underlying economic assumptions of the model. Section 3 explains the design of the study. It gives an overview of the different tax planning strategies and countries considered in this report and summarizes relevant tax parameters. In Section 4, we explain which adaptions to the basic cross-border formula of the Devereux/Griffith model have been made to arrive at the results for CoC and EATR for the different tax planning strategies. Section 5 summarizes the baseline results that present the most tax-efficient way for a multinational parent company to directly finance an investment in a wholly-owned foreign subsidiary. Section 6 discusses the effective tax levels computed for all considered tax planning strategies and compares them to the baseline results. In Section 7, we refer to potential effects of anti-avoidance measures on our results. Finally, Section 8 concludes.

The effect of inflation and interest rates on forward-looking effective tax rates

Every year ZEW Mannheim computes measures of corporate effective taxation in Europe based on the Devereux/Griffith methodology. The measures aim at comprehensively reflecting and consistently comparing the effective corporate tax levels in the different member states. For the computation of the effective tax rates, assumptions on economic parameters have to be made - in particular on the values of the inflation and interest rate. Common assumptions on these variables are strictly necessary in order to compare effective levels of taxation across countries in a meaningful way. In some cases these assumptions could interact with the effects of specific tax parameters on the effective tax burdens. For example, capital allowances become less effective in reducing tax burdens in inflationary environments. As a consequence, countries with high capital allowances appear more attractive when inflation is low. This study aims at analysing and quantifying the effect of the real interest and inflation rate on effective tax measures.

SME taxation in Europe: An empirical study of applied corporate income taxation for SMEs compared to large enterprises. CIP Programme 186/PP/ENT/CIP/12/F/S01C24

This report analyses tax incentives for SMEs in 20 EU countries and five non-EU countries between 2009-2013. Its findings and recommendations are based on a review of tax codes, modelling of tax burdens using two different models, a descriptive analysis of company financial ratios, and the perceptions of tax advisers and companies in each country.

Decline of CFC Rules and Rise of IP Boxes: How the ECJ Affects Tax Competition and Economic Distortions in Europe

The European Court of Justice (ECJ) has become an influential player in the field of direct taxation in the European Union in the past twenty years. However, it is unclear whether the ECJ’s decisions actually increase tax neutrality and therefore contribute to the achievement of an internal market as stipulated by the European treaties or not. In 2006, the ECJ limited the applicability of specific tax rules in Europe that are intended to prohibit the excessive use of low-tax countries. Our counterfactual scenarios show that this restriction of so-called controlled foreign company (CFC) rules and the related emergence of IP boxes cast doubt on the positive effects the ECJ is assumed to have.Additionally, we show that the abolishment of IP boxes would strengthen tax neutrality in Europe. Overall, further research is needed to relate and harmonise economic and legal concepts of tax neutrality.

Tax Competition in Europe - Europe in Competition with Other World Regions?

Corporate tax levels have fallen substantially in Europe during the last decades. A broad literature has identified tax competition as one reason for this decline in corporate tax levels. However, none of these studies explicitly asks the question whether tax competition within regions is different from tax competition across regions, e.g. due to global regionalism of foreign direct investments. This is a crucial question to answer in order to discuss the desirability of tax harmonization in a distinct region, for example, within the European Union. Therefore, the study aims to give hints on the question whether the decline in corporate tax levels in Europe is mainly driven by tax competition between EU member states or by pressure from other world regions. The results of this study, which makes use of tax reaction functions, indicate that there is evidence for tax competition within Europe, whereas there is no robust evidence that European countries compete with countries from other world regions.