Rainer Bräutigam

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 effects of tax reforms to address the debt-equity bias on the cost of capital and on effective tax rates

[Main objectives] Corporate income tax systems usually discriminate between the different sources of finance: They favour debt over equity financing since interest costs are deductible for tax purposes whereas there is no equivalent relief for equity-financed investments. This unequal treatment might cause economic problems such as excessive leverage in the corporate sector and an associated increased vulnerability to economic crises, disadvantages for firms with restricted access to external funds and profit shifting incentives. To achieve an equal treatment of debt and equity financing, either an additional deduction for equity financing could be granted or the current deduction for interest expenses could be disallowed. A disallowance of interest expenses could be achieved by the interest deduction limitation rules which are already employed in several Member States. Other far-reaching, fundamental tax reforms to address the current debt bias are represented by the Comprehensive Business Income Tax (CBIT), Allowance for Corporate Equity (ACE), Allowance for Corporate Capital (ACC) and Cost of Capital Allowance (COCA). The present study provides an in-depth analysis of the effects of these different reform options on effective tax burdens in the EU28 Member States. Moreover, the study gives guidance to which extent current income tax rates at corporate and personal level would have to be adjusted for a revenue neutral implementation of fundamental tax reforms. On the basis of stylised model computations, this study informs about whether different fundamental tax reforms could, in principle, manage to address the debt bias and promote investment, possibly in a revenue neutral way. The main objectives of the study can be summarised as follows: * Analyse current interest deduction limitation rules in the EU28 Member States and assess the effect of interest deduction limitation rules on effective tax rates; * Provide insights on the effects of the fundamental tax reform options on current tax systems; * Consider a revenue-neutral implementation of the reforms and possible consequences for the level of investment in the EU28 Member States.

The development of corporate tax structures in the European Union from 1998 to 2015 : qualitative and quantitative analysis

Ongoing tax reform processes, competitive pressures and the consequences of the financial and sovereign debt crisis have considerably shaped the tax systems of the Member States of the European Union in the last two decades. Our paper combines a qualitative and quantitative analysis of the development of European tax structures based on a unique and comprehensive dataset for the EU-25 Member States between 1998 and 2015. Especially among the EU-15 Member States, we still find evidence for the often-cited trend of tax rate cut cum tax base broadening. In this context, we identify interest deduction limitation rules and loss provisions as main drivers of tax base broadening. Furthermore, the quantitative analysis of effective tax burden scenarios shows that Member States seem to additionally rely on an increased taxation of dividends to balance possible revenue losses associated with reduced corporate income tax rates.

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.