The thesis analyzes how European countries deploy different fiscal instruments (i.e., fiscal barriers and incentives) in the context of tax competition.
The first part of the thesis (International Taxation) gives a brief introduction to the aspects of international taxation which are relevant for the subsequent analysis. The second part (Fiscal instruments in the context of tax competition) provides a detailed overview of the fiscal incentives and fiscal barriers that are used in the context of tax competition. Moreover, through the application of a scoring system, it provides a detailed assessment of each country‘s positioning (i.e., competitive vs. defensive) with respect to individual instruments as well as on an aggregate basis. Building on these findings, the third part (Quantitative analysis) of the thesis provides a further, quantitative analysis. It analyses the correlation of fiscal instruments with one another as well as with selected attributes of the countries (e.g., the size of the economy).
Thirty European countries were analyzed: Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, Switzerland and the United Kingdom.
Table of Contents
1. Introduction
1.1. Motivation
1.2. Research question & approach
2. International Taxation
2.1. Principles of international taxation
2.2. The role of multinational enterprises
2.3. The role of governments
3. Fiscal instruments in the context of tax competition
3.1. Tax rate and base
3.2. Fiscal barriers
3.2.1. Transfer pricing
3.2.1. Thin-capitalization rules & limitation on interest
3.2.2. Withholding taxes
3.2.3. Controlled foreign company legislation
3.2.1. Exit taxation
3.2.2. Exemption rules & switch-over clauses
3.2.3. General anti-avoidance rules
3.2.4. Exchange of information
3.3. Fiscal incentives & non-enforcement
3.3.1. Tax incentives
3.3.2. Non-recognition of permanent establishments
3.3.3. Facilitation of hybrid-mismatch arrangements
3.3.4. Advance pricing agreements & other tax rulings
3.3.5. Non-enforcement
3.4. Conclusion
4. Quantitative analysis
4.1. Methodology and data
4.2. Selection of variables
4.3. Conclusion
5. Final conclusion
Research Objectives & Topics
The primary goal of this thesis is to examine how European countries utilize various fiscal instruments—categorized as fiscal incentives and fiscal barriers—in the context of international tax competition. The research seeks to identify the strategic positioning of selected European nations, moving beyond traditional tax rate comparisons to assess how countries manage mobile capital and profits through specific legislative bundles.
- Analysis of multinational enterprises (MNE) and their role in global tax competition.
- Evaluation of fiscal barriers, including transfer pricing regulations and anti-avoidance rules.
- Assessment of fiscal incentives, such as R&D tax benefits and IP box regimes.
- Quantitative investigation into the correlation between fiscal instruments and national economic attributes.
- Determination of country-specific positioning (competitive vs. defensive) using a bespoke scoring system.
Excerpt from the Book
3.2.1. Transfer pricing
Transfer pricing, next to financing structures, represents the most important channel through which MNE conduct profit shifting. According to a study by Heckemeyer and Overesch (2013), non-financial inter-company transactions account for roughly two-thirds of overall BEPS activity. Consequently, the OECD BEPS project puts a strong focus on this topic, with 4 of its 15 action areas specifically addressing it.
The principle behind profit shifting via transfer prices is simple. Given that value chains of MNE are typically spread across multiple countries, transactions between individual entities of the group take place on an ongoing basis. It is estimated that intragroup transactions account for around 60% of global trade. Through the manipulation of transfer prices for these intra-group transactions (i.e., pricing transactions differently from their actual economic value), MNE can shift profits between their entities. Intermediate goods and services, which form the basis for these transactions, can take varied forms, reaching from simple physical goods and basic services (e.g., rendered by regional service centers) over the provision of intangible assets (e.g., through licensing) to the provision of capital and the assumption of risks.
There is direct evidence from studies of US MNE that, intragroup goods and services that are sold to high-tax (low-tax) entities are priced higher (lower). In a similar vein, a meta-study by Heckemeyer and Overesch (2013), examining 25 studies on the subject of profit shifting, shows that the incidence of profits within a group is strongly correlated with tax rates, with entities located in low-tax countries being significantly more profitable. A similar effect is observable with regards to the propagation of earnings shocks (e.g., unexpected profits) through low-tax and high-tax entities of a group, with the low-tax entities absorbing most of the positive effects. This, along with other research, provides ample evidence of how transfer pricing is used for profit shifting.
Summary of Chapters
1. Introduction: This chapter introduces the evolution of the global economy, the increasing mobility of multinational enterprises, and the resulting challenges for governments in maintaining tax revenues.
2. International Taxation: This chapter outlines the fundamental principles of residence-based and source-based taxation and discusses how MNEs leverage these systems to minimize tax liabilities.
3. Fiscal instruments in the context of tax competition: This chapter provides a detailed analysis of fiscal barriers and incentives, introducing a scoring model to assess the strategic orientation of 30 European countries.
4. Quantitative analysis: This chapter investigates the correlations between various fiscal instruments and national economic attributes to understand the drivers of tax policy deployment.
5. Final conclusion: This chapter synthesizes the research findings, highlighting the shift toward smart tax competition and the emergence of distinct strategic profiles among European nations.
Keywords
Tax Competition, Multinational Enterprises, Fiscal Barriers, Fiscal Incentives, Transfer Pricing, Profit Shifting, BEPS, Corporate Income Tax, Tax Rulings, Smart Tax Competition, European Union, OECD, Tax Avoidance, Tax Policy, Economic Integration.
Frequently Asked Questions
What is the core focus of this thesis?
The thesis explores how European countries use various fiscal instruments, such as barriers and incentives, to compete for mobile capital and profits in an increasingly integrated global economy.
What are the primary thematic areas?
The work covers international taxation principles, the role of MNEs, defensive fiscal barriers (like transfer pricing rules), proactive fiscal incentives (like R&D tax benefits), and quantitative correlations between these tools.
What is the research objective?
The aim is to identify how European countries deploy these specific instruments in the context of "smart tax competition" and to assess their competitive or defensive positioning.
Which scientific methodology is applied?
The author uses a qualitative overview of legislation followed by a quantitative scoring model to assess country positioning, complemented by a correlation analysis of variables like GDP and tax administration expenditures.
What topics are discussed in the main part of the thesis?
The main part details specific instruments, including transfer pricing, thin-capitalization rules, withholding taxes, CFC legislation, exit taxation, and the role of tax rulings and enforcement practices.
How is the work characterized by keywords?
The work is defined by themes of international tax competition, Base Erosion and Profit Shifting (BEPS), the role of the OECD and EU directives, and the strategic use of national tax policies.
How do tax rulings influence tax competition?
Tax rulings can be used as subtle instruments of competition by allowing authorities to secretly grant selective tax advantages or lift barriers for specific companies.
What is the "nexus approach" in the context of IP boxes?
It is an OECD recommendation that ties tax benefits to actual R&D expenditures in a country, ensuring that companies only benefit from tax incentives if they conduct substantial local activity.
Why are Eastern European countries grouped in the middle-field of the ranking?
The research suggests that these countries, being newer to the European Single Market, are still in the process of defining their optimal tax strategy, leading to a more moderate approach compared to the well-defined strategies of older member states.
What is the significance of the Cadbury-Schweppes ruling?
This landmark ECJ ruling limited the application of CFC legislation within the EU to only "wholly artificial arrangements," which hindered defensive barriers and inadvertently encouraged the growth of IP box regimes.
- Citar trabajo
- Cord Weirich (Autor), 2016, Fiscal barriers and/or fiscal incentives? What determines the use of different tax policy instruments by European countries?, Múnich, GRIN Verlag, https://www.grin.com/document/442574
