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Essays on the effect of international corporate taxation on multinational firms’ behaviour

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Universidade do Minho

Escola de Economia e Gestão

Tese de Doutoramento em Contabilidade

Mário José Macedo Marques

janeiro de 2014

Essays on the effect of international corporate taxation on multinational firms’ behaviour

Universidade do Minho

Escola de Economia e Gestão

Trabalho realizado sob a orientação do Professor Doutor Carlos Pinho

Declaração

Nome : Mário José Macedo Marques

Endereço electrónico : [email protected]

Título da tese :

Essays on the effect of international corporate taxation on multinational firms’

behaviour

Orientador :

Professor Doutor Joaquim Carlos da Costa Pinho

Ano de Conclusão : 2014

Designação do Doutoramento: Programa Doutoral em Contabilidade

É AUTORIZADA A REPRODUÇÃO INTEGRAL DESTA TESE APENAS PARA EFEITOS DE INVESTIGAÇÃO, MEDIANTE DECLARAÇÃO ESCRITA DO INTERESSADO, QUE A TAL SE COMPROMETE

Universidade do Minho, ____ / ____ / ______

Assinatura: ________________________________________________

iii

Acknowledgments

I owe a debt of gratitude to my supervisor Professor Carlos Pinho. I have

greatly benefited from his availability, continuous encouragement, and helpful

comments; to Professor Lúcia Rodrigues, who gave me full support when I

decided to restart Ph.D studies at the University of Minho; to António Silva from

Bureau van Dijk for his valuable assistance in the data collection process,

without which the quality of data would not be as high and the time series would

be shorter. I am grateful to University of Minho for the excellent conditions

provided during the past three years; to the Westfälische Wilhelms-Universität

Münster, the European Accounting Association, the Zentrum für Europäische

Wirtschaftsforschung and Gabinete de Apoio à Investigação from School of

Economics and Management of University of Minho for financial assistance.

Thanks are due to my friends and colleagues at the University of Minho for their

encouragement, in particular I would like to thank to Wasim Ahmad for the help

provided in the beginning of the empirical work and Claudia Teixeira for her

enthusiasm and example of resilience. Very special thanks go to my family for

the inspiration, in particular to Claudino Moura, for all the unconditional support

even when I was at my most unbearable.

Several people made specific contributions in the development of the essays,

which are acknowledged at the end of each essay.

v

Essays on the effect of international corporate tax ation on

multinational firms’ behaviour

Abstract

Taxation seems to play a role in economic agents’ decisions, particularly in

companies and governments. In the international arena, multinational

companies play the tax game at different decision levels. Governments in turn

play the game through tax competition, tax coordination and anti-avoidance

rules. The tax responsiveness of multinational companies in the context of tax

coordination and anti-abusive rules is examined and discussed in this thesis.

Although bilateral tax treaty effects have been subject to a myriad of empirical

literature, the findings on the impact of these tax agreements on investment are

controversial. Hence, the first essay uses micro-level data to re-examine the

influence of treaty formation on foreign investment location decisions.

Tax coordination within the European Union is being discussed in relation to a

common corporate tax system, which will eliminate traditional profit-shifting

strategies. The additional tax distortions of investment produced by such a tax

design are poorly explored in the empirical literature. The second essay

evaluates the extent to which the volume of foreign investment is associated

with international tax planning.

Due to the increasing tax-planning strategies, governments have been

implementing transfer pricing regulations and enforcement mechanisms. The

assessment of the effectiveness of this anti-tax-avoidance measure is relevant

as it implies high costs for both governments and companies. The third essay

examines the extent to which the introduction of a stricter transfer pricing

framework mitigates the reallocation of profits.

The findings confirm that international taxation exerts a significant influence on

investment decisions as well as on profit location. Moreover, tax treaties are

found to impact positively on the location of new foreign subsidiaries. The

identified negative relation between the investment level responsiveness to the

host country’s corporate taxation and the taxable income sensitivity to tax rate

vi

differentials suggests that the elimination of profit shifting will be achieved at the

expense of more tax distortions of investment. Finally, the introduction and

tightening of transfer pricing regulation and enforcement appear to deter

international transfer-price manipulation.

vii

Ensaios sobre o efeito da tributação internacional no

comportamento das empresas multinacionais

Resumo

A tributação parece afectar as decisões dos agentes económicos,

particularmente das empresas e dos governos. No contexto internacional, as

empresas jogam o ‘jogo dos impostos’ em diferentes níveis de decisão. Os

governos por outro lado fazem-no através da competição fiscal, da

coordenação fiscal e das regras de combate à evasão fiscal. Esta tese examina

e discute o efeito da tributação nas decisões das multinacionais num contexto

de coordenação fiscal e de regras anti-evasão fiscal.

Embora o efeito dos acordos fiscais bilaterais tenha sido objecto de significativa

investigação, são contraditórias as evidências sobre o seu efeito no

investimento. Por isso, o primeiro ensaio reexamina a influência da formação

dos acordos fiscais nas decisões de localização de investimento estrangeiro.

Tem sido discutida na União Europeia a coordenação fiscal através de um

sistema de tributação comum que irá eliminar as tradicionais estratégias de

transferência de lucros. As distorções no nível do investimento que o desenho

de tal sistema acarreta estão pouco exploradas na literatura empírica. Assim, o

segundo ensaio avalia em que medida o nível de investimento estrangeiro está

associado às actividades de planeamento fiscal internacional.

Devido ao crescente planeamento fiscal, os governos têm implementado regras

de preços de transferência e reforçado o seu enforcement. Aferir a eficácia

desta medida é relevante na medida em que são elevados os custos que a sua

implementação implica quer para governos quer para empresas. O terceiro

ensaio analisa em que medida a introdução de estruturas legais de preços de

transferência mais restritivas mitigam a relocalização de lucros.

Os resultados obtidos confirmam que a tributação internacional tem efeitos

significativos nas decisões de investimento e de localização de lucros. Além

disso, os acordos fiscais parecem ter um impacto positivo na localização de

novas empresas subsidiárias estrangeiras. A relação negativa identificada entre

viii

o efeito dos impostos sobre o nível de investimento e a sensibilidade dos lucros

relatados às diferenças nas taxas de imposto, sugere que a eliminação da

transferência de lucros poderá alcançar-se com mais distorções do

investimento. Finalmente, a introdução ou reforço da regulação e enforcement

dos preços de transferência parecem dissuadir a manipulação internacional dos

preços de transferência.

ix

Contents

Acknowledgments ................................... ........................................................ iii

Abstract .......................................... ................................................................... v

Resumo ............................................ ............................................................... vii

Contents .......................................... ................................................................. ix

Abbreviations ..................................... ........................................................... xiii

List of tables .................................... ............................................................... xv

Introduction ...................................... ................................................................ 1

References ................................................................................................... 13

Essay1: Tax Treaty Effects on Foreign Investment: E vidence from

European Multinationals ........................... ..................................................... 17

1.1 Introduction ......................................................................................... 19

1.2 Previous literature review .................................................................... 20

1.3 A tax measure of bilateral tax treaties ................................................. 22

1.4 Data and research methodology ......................................................... 30

1.4.1 Data and descriptive statistics ...................................................... 30

1.4.2 Research methodology ................................................................. 34

1.5 Estimation results ................................................................................ 37

1.5.1 Baseline results ............................................................................ 37

1.5.2 Alternative estimation procedure .................................................. 43

1.6 Robustness checks ............................................................................. 46

1.7 Conclusions ......................................................................................... 48

Appendix A: Years in which double taxation agreements became effective . 51

x

Appendix B: Foreign income tax system by country ..................................... 55

Appendix C: Effective tax rates by country-pair ............................................ 57

Appendix D: Estimates on the effect of tax treaties on the number of new

foreign subsidiaries: All variables lagged by one year .................................. 67

Acknowledgements ....................................................................................... 69

References ................................................................................................... 69

Essay 2: The Tax Responsiveness of Investment under Increasing

Opportunities for Profit Shifting. An Empirical Ana lysis ............................ 73

2.1 Introduction ......................................................................................... 75

2.2 The common consolidated corporate tax base .................................... 77

2.3 Background and hypothesis development ........................................... 80

2.3.1 Relation between profit shifting and real investment ..................... 80

2.3.2 Real investment and profit location in the European context ........ 82

2.4 Empirical analysis................................................................................ 86

2.4.1 The data ....................................................................................... 86

2.4.2 Empirical strategy ......................................................................... 89

2.5 Empirical results .................................................................................. 91

2.5.1 Investment responses to taxation and profit-shifting ability ........... 92

2.5.2 Effects of corporate taxation on investment under heterogeneous

incentives for profit shifting ........................................................................ 97

2.6 Conclusions ....................................................................................... 103

References ................................................................................................. 105

Essay 3: Transfer Pricing Strictness and Profit Shi fting within European

Multinationals .................................... ........................................................... 109

3.1 Introduction ....................................................................................... 111

xi

3.2 Background and hypothesis development ......................................... 113

3.2.1 Effectiveness of anti-avoidance measures ................................. 114

3.2.2 Costs of shifting and incentives for profit shifting ........................ 115

3.3 Transfer pricing rules and enforcement mechanisms in Europe ....... 117

3.4 Measuring the strictness of transfer pricing frameworks ................... 119

3.4.1 Development of the transfer pricing strictness index .................. 119

3.4.2 Assigning weightings to different attributes ................................. 125

3.5 The data ............................................................................................ 129

3.6 Empirical strategy .............................................................................. 131

3.7 Empirical results ................................................................................ 134

3.7.1 Baseline results .......................................................................... 134

3.7.2 Robustness checks ..................................................................... 139

3.8 Conclusions ....................................................................................... 145

Appendix A: Allocation of the attributes ...................................................... 147

Appendix B: Research instrument used for the survey ............................... 155

Appendix C: Impact of the strictness index using alternative tax rate

differentials (using EBT variable) ................................................................ 157

Acknowledgements ..................................................................................... 159

References ................................................................................................. 159

Conclusions ....................................... ........................................................... 163

xiii

Abbreviations

CCCTB Common Consolidated Corporate Tax Base

CFC Controlled Foreign Company

CTB Consolidated Tax Base

EBIT Earnings Before Interest and Taxes

EBT Earnings Before Taxes

EU European Union

FDI Foreign Direct Investment

FENB Fixed Effects Negative Binomial

GDP Gross Domestic Product

IBFD International Bureau of Fiscal Documentation

OECD Organization for Economic Co-operation and Development

PwC PricewaterhouseCoopers

STR Statutory Tax Rate

UN United Nations

xv

List of tables

Table 1.1 Bilateral Tax Treaties Network in Europe in 2009 ............................ 23

Table 1.2 Non-Resident Withholding Tax Rates on Dividends in 2009 ............ 24

Table 1.3 Corporate Tax Rates ........................................................................ 26

Table 1.4 Foreign Income Tax Systems and Calculation of Effective Tax Rates27

Table 1.5 Effective Tax Rates in 2009 .............................................................. 29

Table 1.6 Number of New Foreign Subsidiaries between 2000 and 2009 ........ 31

Table 1.7 Descriptive Statistics ........................................................................ 34

Table 1.8 Effects of Different Tax Instruments on the Number of New Foreign

Subsidiaries: Country-Pair Fixed Effects Negative Binomial ............................ 38

Table 1.9 Effects of Tax Treaties on the Number of New Foreign Subsidiaries:

Country-Pair Fixed Effects Negative Binomial .................................................. 40

Table 1.10 Effects of Tax Treaties on the Number of New Foreign Subsidiaries:

An Alternative Estimation Procedure ................................................................ 44

Table 1.11 Number of New Foreign Subsidiaries for Country-Pairs

Implementing a Tax Treaty between 2000 and 2009 ....................................... 46

Table 1.12 Nearest Neighbour Matching Estimation for Average Tax Treaty

Effect ................................................................................................................ 48

Table 2.1 Distribution of Foreign Subsidiaries .................................................. 87

Table 2.2 Descriptive Statistics ........................................................................ 88

Table 2.3 Host Countries’ Corporate Tax Rates ............................................... 90

Table 2.4 Effect of Corporate Taxation on the Subsidiaries’ Fixed Assets under

Heterogeneous Profit-Shifting Ability ................................................................ 93

xvi

Table 2.5 Effect of Corporate Taxation on the Subsidiaries’ Employment under

Heterogeneous Profit-Shifting Ability ................................................................ 95

Table 2.6 Effect of Corporate Taxation on the Subsidiaries’ Employment under

Heterogeneous Profit-Shifting Ability: Sample not Aggregated ........................ 96

Table 2.7 Effect of the Corporate Tax Rate on Real Investment under

Heterogeneous Profit-Shifting Incentives ......................................................... 99

Table 2.8 Robustness Checks I ...................................................................... 101

Table 2.9 Robustness Checks II ..................................................................... 102

Table 3.1 Characterization of a Transfer Pricing Framework ......................... 121

Table 3.2 Assigned Attributes in 2001 and 2009 ............................................ 124

Table 3.3 Characterization of the Sample of Transfer Pricing Experts ........... 126

Table 3.4 Survey Results and Weighting Calculation ..................................... 127

Table 3.5 Strictness Index by Country and Year ............................................ 128

Table 3.6 Distribution of Foreign Subsidiaries ................................................ 130

Table 3.7 Descriptive Statistics ...................................................................... 132

Table 3.8 Effect of Non-Weighted Sums of Regulation and Enforcement

Attributes ........................................................................................................ 136

Table 3.9 Impact of Transfer Pricing Strictness on Profit-Shifting Activities ... 138

Table 3.10 Robustness Checks I .................................................................... 140

Table 3.11 Robustness Checks II ................................................................... 141

Table 3.12 Robustness Checks III .................................................................. 143

Introduction

3

The world economy is characterized by increasing international trade and

foreign direct investment (FDI), which have been leading to increasing

integration of economies. With globalization, more companies are investing

abroad and developing international activities (Barrios et al., 2012). In 2012, the

gross domestic product (GDP) worldwide was US$70 trillion, global exports as

well as the global stock of FDI reached US$22 trillion each, and the global sales

from FDI subsidiaries were US$28 trillion (World Economic Forum, 2013).

Subsidiaries’ sales represent a significant driver of international trade, slightly

larger than global exports, predominantly consisting of trade in intermediate

goods and services that are incorporated into production process at various

stages (UNCTAD, 2013; World Economic Forum, 2013).

The remarkable importance of multinational companies has been

challenging for countries, which compete to host foreign investment. Devereux

and Griffith (1998) and Devereux (2006) conceptualize multinational companies’

decisions regarding foreign investment in a four-level decision tree as follows:

(1) a company must decide how to enter a foreign market: either by producing

at home and exporting or by producing abroad, (2) conditional on choosing to

produce abroad, the firm must decide where to locate the production, (3)

conditional on a particular location, the company must decide on the optimal

scale of investment and (4) finally, the company may reallocate its profits using

different tax-planning strategies. Corporate taxation is taken into account in all

these four stages, always in order to maximize the choices’ return. There is a

broad body of empirical literature examining the responses of multinational

companies to corporate taxation which can be analysed, as Devereux (2006)

suggest, in the light of this decision-making framework.

Kemsley (1996) finds that firms accessing foreign markets seem to take

into account the host and home countries’ corporate taxation when deciding

whether to export or to produce abroad. Once the decision to produce abroad

has been made, the decision regarding the location follows. Apart from a set of

other determinants in this decision, such as the dimension of and closeness to

the target markets and the labour costs, the corporate taxation of the potential

host country is also relevant to this decision. For instance, Devereux and Griffith

(1998) find that the effective average tax rate, which depends on both tax bases

4

and tax rates, significantly impacts the location decision of US multinational

firms in the United Kingdom, France and Germany, conditional on having

decided to invest in Europe. Buettner and Ruf (2007) taking a sample of

German multinationals and investment in eighteen potential host countries, find

the statutory tax rate (STR) to impact significantly on this decision.

The above two decision levels are discrete in the sense that the firm

should choose among two or more available alternatives. Most of the empirical

literature focuses on the third level of the above decision tree, consisting of

testing the impact of taxation on the continuous choice of the scale of

investment. The literature is widely consensual in sustaining that corporate

taxation in the host country increases the cost of capital, leading to a decrease

in the optimal level of investment (surveys are provided by Hines, 1999; De

Mooij and Ederveen, 2003, 2006; Devereux, 2006; Feld and Heckemeyer,

2011).

Finally, regarding the location of profits, there is consistent evidence that

tax rate differences among countries create incentives for multinational

companies and their subsidiaries to shift profits from higher- to lower-tax

countries. Multinational companies have the ability to engage in cross-border

profit shifting (surveys are provided by Hines, 1999; Heckemeyer and

Overesch, 2013). Empirical evidence of this strand of literature points out

different channels through which profit shifting is carried out. First, the prices of

intra-company transactions are manipulated being significantly different from

those set when transactions occur between unrelated parties (e.g. Swenson,

2001; Clausing, 2003). Second, intra-company financial transactions are carried

out with the purpose of locating higher amounts of debt in lower-tax locations in

order to book higher amounts of income there (e.g. Ramb and Weichenrieder,

2005; Huizinga et al., 2008). Finally, some costs, such as management services

and research and development expenses, may be shared within the corporate

group in order to decrease the overall tax burden (e.g. Grubert, 2003; Azemar

and Corcos, 2009).

In the international taxation arena, the role of governments is first of all to

set tax policies to tax their own resident firms with operations abroad and

foreign investors operating in their countries. Corporate tax system differences

5

among countries are capable of influencing investment decisions, location and

volume, as well as profit location. These effects entail inefficiencies in the

allocation of resources as ideally tax systems should be globally neutral in the

sense that the investment decisions should reflect the market preferences,

ignoring tax considerations (Dagan, 2003). Moreover, the ability of multinational

firms to reallocate their profits in order to reduce their overall tax burden erodes

tax revenues.

The identified tax responses of multinational companies are to some

extent a consequence of tax competition undertaken by governments

worldwide. Tax competition, consisting of preferential tax regimes and low

effective tax rates, reflects the aim of governments to attract firms, mobile

capital and profits (e.g. Wilson, 1999; Haufler and Schjelderup, 2000). The

result of this is the so-called race-to-the-bottom, in which both home and host

countries keep reducing their corporate tax rates, leading eventually to a zero

tax rate. This is not desirable, as it undermines the welfare state (Dagan, 2003).

Apart from tax competition, governments play other roles in the

international setting, such as tax coordination and setting anti-avoidance

measures. All of them have different intents and are discussed and approached

in different strands of the literature. The present thesis aims to analyse business

responses to corporate taxation at different levels of Devereux and Griffith’s

decision tree in the context of tax coordination and anti-tax-avoidance

measures. Specifically, the role of corporate taxation combined with tax policies

and legislative measures that have already been implemented or are to be

implemented is examined. Hence, below specific coordination initiatives -

double tax treaties and the European Commission’s new proposal for a

common tax system – are discussed more extensively, as well as a particular

anti-tax-avoidance measure - transfer pricing regulation and enforcement.

Tax coordination consists of bilateral or multilateral tax agreements among

countries in order to reduce distortions of corporate taxation as well as to

reduce harmful aspects of tax competition. For instance, tax coordination in the

European Union (EU) is partly related to concerns that tax competition in an

environment of increasingly integrated economies will significantly decrease the

level of corporate income taxation (Zodrow, 2003).

6

An important example of tax coordination is double-taxation treaties, also

denoted as bilateral tax treaties or double-taxation agreements. The current

bilateral tax treaties are all based on two models, the Organisation for Economic

Co-operation and Development (OECD) and the United Nations (UN) model

(Avi-Yonah, 2009). The former convention model is mostly used by developed

countries, while the latter is used by developing countries.

Double taxation is defined as the imposition of a tax in two or more

countries on the same income for a similar time period (OECD, 2010). Bilateral

tax treaties have the purpose of alleviating or eliminating the double taxation of

foreign-sourced income of multinational companies. The importance of

eliminating double taxation is that it creates a barrier to the international

‘exchange of goods and services and movements of capital, technology and

persons’ which deters the ‘development of economic relations between

countries’ (OECD, 2010).

With this purpose, double-taxation treaties coordinate tax definitions and

jurisdictions, such as the definition of a permanent establishment, which is a

fundamental concept in establishing the right to tax. Furthermore, tax

agreements provide mechanisms, either exemption or credit systems, to be

used in order to remove double taxation.

In 1963 and 1977, the model title of the OECD included a reference to the

elimination of double taxation. As the model exceeds by just this aim, this

reference was eliminated, though currently some tax treaties are still signed

under this title. Actually, another purpose of tax agreements is to prevent tax

evasion. To this end, tax treaties include rules stating terms and conditions in

which cross-border transactions between associated companies should be

carried out. Furthermore, a special provision is usually included concerning the

exchange of information intending not only to guarantee the full application of

the tax treaty but to help the administration or enforcement of the domestic tax

laws. Finally, double-tax treaties also provide the allocation rules of passive

income, which is a channel to avoid higher-tax home countries.

Other attached outcomes are attained with tax treaties, which, along with

the elimination of double taxation, have predictable positive implications for

7

foreign investment. First, tax treaties usually lower the withholding tax rates

between treaty countries, leading to a reduction in the effective tax rate of

multinational companies. Second, bilateral tax treaties have effects on reducing

tax uncertainty over the tax environment (Davies, 2004), and as tax treaties

provide an agreement procedure, this reduces the likelihood of firms finding

themselves between tax authorities’ disputes.

From the discussion above, one could argue that it is likely that bilateral

tax treaties impact positively on foreign investment. The evidence from the

empirical literature is, however, controversial. While researchers using country-

level data find either insignificant (e.g. Blonigen and Davies, 2002, 2004;

Davies, 2003; Louie and Roussland, 2008) or even slightly negative effects of

treaties on foreign investment (e.g. Egger et al., 2006), those using firm-level

data find positive effects of treaty formation on extensive margins of investment

(e.g. Davies et al., 2009; Egger and Merlo, 2011).

The first essay of the thesis has the purpose of shedding more light on tax

treaties’ effects. Specifically, it takes a broader set of European countries and a

large number of new foreign subsidiaries and examines the extent to which

bilateral tax treaties impact on FDI. The underlying research question requires a

quasi-experiment approach able to identify a treatment and a control group. In

order to analyse the effects of tax treaty formation on investment, it is necessary

to examine whether or not there is a significant change in investment when

country-pairs move from ‘no effective tax treaty’ to ‘effective tax treaty’ status

and compare the result with country-pairs with no tax treaty effective in the

entire period. A panel design is suitable for answering the question as it

compares transition country-pairs with country-pairs with no change in their tax

treaty status. Econometric methods are used, particularly count data panel

models as the foreign investment is a count of new foreign subsidiaries.

The discussion above emphasizes tax coordination in a bilateral setting,

however multilateral agreements have already been implemented, although

confined to a restricted set of countries, such as the Nordic multilateral tax

treaty, signed by Denmark, Finland, Iceland, Norway and Sweden. Multilateral

agreements in the EU have also been implemented in specific areas, by the EU

Parent-Subsidiary Directive - which eliminates withholding taxes on dividends

8

paid between member states - as well as by the EU Interest and Royalty

Directive - which eliminates withholding taxes on interest and royalty payments

in the EU area. Despite that, on the whole, attempts at multilateral agreements

have failed (Davies, 2004). One reason is that EU member states seem

unwilling to relinquish their fiscal policy sovereignty to pursue their own national

objectives (see e.g. Dagan, 2003).

For decades, attempts to achieve broader multilateral tax coordination or

tax harmonization of corporate taxation within the EU have been unsuccessful,

despite some steps having been taken in particular areas. This means that the

existing system in the EU consists of multinational companies and their foreign

subsidiaries being taxed by each member state according to their respective

corporate tax domestic laws. This system is usually denoted as the separate

accounting system.

Since the beginning of the 2000s, the replacement of the separate

accounting system with a ‘two-step consolidation-apportionment procedure’ has

been discussed (Devereux and Loretz, 2008, p. 1). The so-called Common

Consolidated Corporate Tax Base (CCCTB) consists of consolidating the EU-

wide tax base of corporate groups, according to a single set of common tax

rules, followed by the apportionment of the determined taxable base to each

member state according to a sharing mechanism. The tax base is subsequently

taxed in each member state where a corporate group operates according to the

respective STR, the setting of which remains at the sovereignty of member

states.

The aims of having such common rules for determining the EU-wide

consolidated tax base are reduce the compliance costs resulting from the

presence of numerous different tax systems, to facilitate foreign investment,

reducing economic distortions of the allocation of investment and also to

decrease cross-border profit shifting (see e.g. Fuest 2008; Bettendorf et al.,

2010). Moreover, this system will change the tax revenue collections of each

member state (Fuest, 2007; Devereux and Loretz, 2008, provide an analysis of

the effect of the CCCTB on tax revenues). According to the CCCTB proposal, in

the computation of the tax base, corporate groups must eliminate intra-company

transactions. Such a procedure will eliminate activities towards shifting profits

9

from higher- to lower-tax countries, whereby the current profit-shifting strategies

will become obsolete.

Additionally, the formula for apportioning the tax base to each member

state is based on assets, labour and sales. The formula assures, on one hand,

source-based taxation, via labour and assets, and on the other hand

destination-based taxation, via sales (Devereux, 2004). Although the latter tax

system eliminates tax distortions of investment and profit location, the former

has potentially distortive effects on the location decisions of investment as well

as on the amount of foreign investment, as countries will be able to compete

over the STR.

The existing theoretical literature shows that the tax responsiveness of

foreign investment is negatively associated with the sensitivity of taxable

income to tax rate differentials. To put it another way, the sensitivity of real

investment to corporate taxation in host countries seems to be inversely

associated with cross-border profit shifting. The elimination of the current profit-

shifting strategies within the EU as a result of the implementation of the CCCTB

could then be achieved at the expense of higher tax distortions of investment

location decisions.

This leads to the second essay, which, using a sample of European

foreign subsidiaries, empirically evaluates whether there is a negative

relationship between the tax responsiveness of foreign investment and profit-

shifting activities. Assessing such a relation is particularly instructive in the

current discussion of the CCCTB as it clarifies whether or not eliminating profit-

shifting activities will introduce additional distortive effects of corporate taxation

on investment. A suitable research design might be to compare the effect of the

host country’s tax rate on investment for companies differing in their profit-

shifting activities. Hence, an approach is developed to identify and set foreign

subsidiaries’ subsamples differing in their ability and incentive for profit shifting.

Having identified the ‘shifter’ and ‘non-shifter’ subsamples, it is evaluated and

compared whether the sensitivity of foreign subsidiaries’ investment to the host

country’s corporate tax rate differs significantly between ‘shifter’ and ‘non-

shifter’ companies. The data analysis makes use of econometric methods,

particularly the fixed-effects linear regression model.

10

Alongside the earlier-discussed tax coordination and competition, setting

anti-tax-avoidance rules is another important role played by governments. The

advent of the international investment and economic integration brought

unprecedented challenges for countries’ tax policy regarding international tax

avoidance. Tax avoidance is defined by the OECD as an ‘arrangement of a

taxpayer's affairs that is intended to reduce his tax liability and that although the

arrangement could be strictly legal it is usually in contradiction with the intent of

the law it purports to follow’. The bottom line from this concept is that taxpayers

exploit, albeit legally, the tax law in order to maximize their own benefit.

International tax-avoidance techniques comprise, namely, the use of bilateral

tax treaties to avoid withholding tax rates, the use of low-tax countries to shelter

corporate income through artificial intermediary firms and the excessive use of

debt, particularly intra-company debt and non-arm’s length related-party

transactions.

The increasing tax-avoidance activities, with serious implications for the

erosion of tax revenues, have led governments worldwide to introduce

legislative initiatives as countermeasures against the increasing tax-avoidance

strategies by multinational companies. Governments’ measures have also been

followed by several international and regional organizations, which have been

active in discussing anti-tax-avoidance measures and proposing them to

governments (e.g. the OECD; the UN; the EU).

A specific measure concerns transfer pricing. The transfer price is the

price paid between related companies for their inter-company transactions. The

transfer-pricing rules rely on the arm’s length principle, which requires related-

party transactions to be priced as if the transactions had taken place between

independent businesses (OECD, 2012). The transfer-pricing guidelines issued

by the OECD, firstly in 1979 and regularly revised, are commonly followed not

only by OECD members but also by non-member countries. The

implementation of transfer-pricing legislation is intended to ensure that the

allocation of profits is not driven by tax considerations. In an international

setting, such tax considerations lead corporate groups to report higher

corporate profits in lower-tax countries.

11

Transfer-pricing regulations commonly provide a general principle that

should underlie intra-company transactions (i.e. arm’s length), and state the

methods to which companies should adhere for price setting and the

circumstances in which each one should be selected. Some countries also

include some sort of method hierarchy to be followed. Finally, regulations

provide the documentation requirements that companies should prepare, which

detail the calculation of transfer prices. Furthermore, in order to ensure the

application of transfer-pricing rules, several countries use different enforcement

mechanisms. Such enforcement instruments include a frame of penalties, for

failing to meet the documentation requirements and for adjustments in taxable

income on the annual tax return, and the existence of specialized transfer-

pricing teams within tax administrations also responsible for transfer-pricing

audits.

Countries worldwide are still at different stages of implementation of

transfer-pricing rules. In Europe, the transfer-pricing frameworks implemented in

national tax laws also differ regarding both regulation and enforcement

mechanisms. For instance, in 2009, ten of the EU member states had not

already implemented formal documentation requirements, although at that time

all countries had established the general arm’s length principle. Countries

considered recipients of profit shifting seem to have less stringent transfer-

pricing frameworks (e.g. Malta, Cyprus, Luxembourg, Austria and Ireland).

Examining the effectiveness of anti-tax-avoidance, particularly regarding

transfer-pricing regulations and enforcement mechanisms, is of great interest as

these regulations are highly costly for both governments (e.g. the costs of

human and material resources) and companies (e.g. compliance costs). The

third essay of this thesis assesses the extent to which the introduction and

tightening of transfer-pricing frameworks in Europe is effective in dampening

international profit shifting. The evidence needed in order to answer the

research question again requires a comparison of profit-shifting activities across

different transfer-pricing frameworks. Unlike the previous essay, now it is not

necessary to split the sample according to different transfer-pricing frameworks,

but to examine such an effect in a continuous setting. Thus, the transfer-pricing

frameworks for each European country and year are firstly assessed. With that

12

purpose, the attributes characterizing a transfer-pricing framework are identified

and information collected for each country and sample period. An index is then

built upon this. Using a panel of foreign subsidiaries in Europe, it is examined

whether or not alterations of transfer-pricing frameworks imply different

intensities of profit-shifting activities.

The following essays comprise the author’s contribution to the debate

regarding the responses of multinational companies to corporate taxation. The

essays are arranged in the order of their conception, and may be read

independently. The thesis is organized as follows.

Essay 1 revisits and re-examines the effects of bilateral tax treaties on

foreign investment location decisions using a large panel of European countries.

The analysis relies on the bilateral tax treaties network and aims to test whether

tax treaties’ formation has implications for the number of new foreign

subsidiaries incorporated over time.

Essay 2 briefly discusses the European Commission’s CCCTB directive

proposal and tests the extent to which the investment responsiveness to

corporate taxation is inversely associated with cross-border profit-shifting

activities in order to shed light on whether lowering financial tax-planning

activities, which will be brought about by the CCCTB, can be expected to cause

additional tax distortions of foreign real investment.

Essay 3 examines the extent to which the stringent transfer-pricing

framework deters income-shifting strategies by European multinational

companies. To do so, an index was developed that measures the transfer-

pricing framework strictness by host country and year. Then, tax rate

differentials are used to capture profit-shifting incentives and are interacted with

the strictness index to assess whether the host country’s transfer-pricing

framework impacts on profit-shifting behaviour.

Finally, the conclusions of the thesis are provided based on the main

findings of the presented essays and several recommendations are made for

future research.

13

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16

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Union. International Tax and Public Finance, 10, 651-671.

Essay 1

Tax Treaty Effects on Foreign Investment:

Evidence from European Multinationals

19

1.1 Introduction

One important trend in the context of globalisation is the notable increase in

FDI. There is an extensive body of empirical research arguing that, among other

factors, tax burden plays a role in defining business strategies, including foreign

investment location (see Devereux, 2006; De Mooij and Ederveen, 2003, 2006

for a survey). For instance, De Mooij and Ederveen (2006) surveyed empirical

literature on income tax effects and found a typical tax semi-elasticity of -2.1.

A matter that emerges from the international investment is the

international double-taxation, which occurs when foreign-source income is

taxed by both home and host countries and no unilateral or bilateral double-

taxation relief is provided. About 50 per cent of current bilateral tax treaties

worldwide were signed throughout the 2000s. The aim of bilateral tax treaties is

‘to remove the obstacles that double taxation presents’, which causes ‘harmful

effects on the exchange of goods and services and movements of capital,

technology and persons’ (OECD, 2008, p. 7). Regarding corporate income

taxes, tax treaties enable contracting countries to define in which jurisdiction

income will be taxed (source-based or residence-based), and to reduce

withholding tax rates on dividends, interests and royalty payments from an

affiliate to a parent company (Blonigen and Davies, 2002). Furthermore, tax

treaties may reduce tax uncertainty, which negatively affects foreign investment

decisions (e.g. Edmiston et al., 2003).

Some authors have found insignificant (e.g. Blonigen and Davies, 2002,

2004; Davies, 2003; Louie and Roussland, 2008) or even negative effects (e.g.

Egger et al., 2006) of bilateral tax treaties on foreign investment, and have

hypothesized the negative effects as being due to the additional exchange of

information that comes with the treaties. Information exchange may increase

the tax burden, since its avoidance or evasion becomes more difficult. On the

other hand, treaties reduce effective tax rates, which make them more

beneficial all round.

20

In an extended European context, this essay reassesses the influence of

bilateral tax treaties on the location decision of foreign investment using micro-

level data. Firstly, a typical explanatory binary variable that identifies both treaty

and non-treaty country-pairs is used to examine the extent to which tax treaties

have impacts on the number of new foreign subsidiaries incorporated by

European multinationals. Then this variable is replaced with an effective tax

rate, which takes into account tax treaties and their respective features

regarding withholding tax rates on dividends and double-taxation relief methods.

Also the effective tax rate is included with the treaty binary variable (rather

than using them as alternative variables) to test whether tax treaties’ features -

apart from the double-taxation relief systems and withholding tax rates on

dividends - have an effect on location decisions. Unlike several previous

studies, findings suggest a positive effect of tax treaties on bilateral FDI.

The remainder of the essay is organized as follows. The next section

provides a brief review of previous literature regarding the effects of bilateral tax

treaties. Section 1.3 presents and discusses effective tax rate design. Section

1.4 provides the sample employed in the empirical study and the research

approach adopted. Section 1.5 presents and discusses the results, followed by

a section devoted to robustness tests. The last section concludes.

1.2 Previous literature review

The effects of bilateral tax treaties on foreign investment decisions have been

predominantly analysed since the beginning of the last decade. Some authors

argue that bilateral tax treaties should increase international trade and foreign

investment, as they tend to reduce the obstacles raised by taxation. Others

suggest that the main purpose of tax treaties is to prevent tax evasion by

improving the exchange of information between treaty countries. In most

treaties, the referred improvement regards transfer pricing rules. Empirical

evidence is not consensual on the effect of tax treaties, as findings suggest

negative, positive or no significant impacts (e.g. Blonigen and Davies, 2002,

21

2004; Egger et al., 2006; Neumayer, 2007; Barthel et al., 2010; Egger and

Merlo, 2011).

Most of the existing empirical literature examines the effects of treaties at

an aggregate level of foreign investment (e.g. Blonigen and Davies, 2002, 2004;

Davies, 2003; Egger et al., 2006; Neumayer, 2007; Millimet and Kumas, 2007;

Louie and Rousslang, 2008; Barthel et al., 2010). Recently, however, studies

have emerged examining tax treaty effects at the firm level (e.g. Davies et al.,

2009; Egger and Merlo, 2011). The following paragraphs review the main

literature that uses both of these different approaches.

Blonigen and Davies (2002, 2004) studied tax treaty effects on FDI of the

OECD countries and the U.S. and found that the impact of tax treaty formation

on inbound and outbound FDI stock seems to be less significant than expected.

Although the initial results have suggested that FDI is increased by bilateral tax

treaties, findings in both studies indicate that new treaties are not associated

with foreign investment. Egger et al. (2006) found similar insignificant effects on

bilateral stocks of outward FDI when log specification is used. The authors then

found that treaties had a significantly negative effect on the treatment country-

pairs group when using the difference-in-difference approach.

Other empirical studies have been developed focusing on the

renegotiation of tax treaties (e.g. Davies, 2003); on the potential heterogeneous

effects referring to the distributions of FDI activity (e.g. Millimet and Kumas,

2007); on multinationals’ required rate of return (e.g. Louie and Rousslang,

2008); and on developing countries (e.g. Neumayer, 2007; Barthel et al., 2010).

The overall findings vary from modest magnitude effects to totally opposing

ones.

Recently there have been some studies reassessing the effects of tax

treaties formation on multinationals’ investment using firm-level data. Davies et

al. (2009) and Egger and Merlo (2011) analysed the extent to which bilateral tax

treaties have effects on foreign investment decisions at the extensive margin

(i.e. location decisions) and intensive margin (i.e. level of investment). Both

studies found that the existence of a tax treaty with the respective parent

22

countries (Sweden and German) increases the probability of a multinational

having a subsidiary in a given country.

Blonigen and Davies (2004, p. 616) stated that some empirical ‘results

suggest either that provisions of a treaty have no effect or that the positive and

negative aspects of treaty formation largely cancel one another’. This essay

proposes to shed more light on the different effects of tax treaties. The

mentioned micro-level studies test the impact of tax treaties on investment

decisions for particular European countries; however, as pointed out by Davies

et al. (2009), there is no guarantee of similar results when other countries are

taken into account. Furthermore, using an effective tax rate which takes into

account features of tax treaties, may avoid confounding effects of tax treaties.

1.3 A tax measure of bilateral tax treaties

In the last decade there has been a significant increase in the bilateral tax

agreements network. Around 50 per cent of bilateral treaties worldwide were

signed during the 2000s. Table 1.1 shows the European network of bilateral tax

treaties in 2009 (Appendix A provides information on the years of tax treaties).

On average, 81.7 per cent of country-pairs in the sample have

implemented bilateral tax treaties. In 2009, for example, some countries had

tax treaties with all countries (e.g. Belgium, Italy, Norway, Hungary, Romania),

while others only implemented treaties with less than 75 per cent of the

countries referred to in the sample (e.g. Albania, Cyprus, Serbia).

In looking to remove the hurdles that exist with double taxation, bilateral

tax treaties usually (a) decrease the withholding tax rates on dividend

payments, and (b) eliminate or mitigate international double taxation through a

foreign tax relief system. In the sample, the average rate imposed on dividends

repatriated to a parent company located in a treaty country is 3.2 per cent, while

the rate rises to 13 per cent if the parent country is a non-treaty country (Table

1.2 provides non-resident withholding tax rate for 2009).

23

Table 1.1

Bilateral Tax Treaties Network in Europe in 2009

Note: This table displays the European tax treaty network. The rows correspond to host countries’ investment; the columns correspond to the location of multinationals. For a given country-pair, 1 denotes that a bilateral tax treaty is applicable and 0 otherwise. Source: International Bureau of Fiscal Documentation, Ernst & Young’s Worldwide Corporate Tax Guide and websites of various fiscal authorities.

Alb

ania

Aus

tria

Bel

gium

Bul

garia

Cro

atia

Cyp

rus

Cze

ch R

.

Den

mar

k

Est

onia

Fin

land

Fra

nce

Ger

man

y

Gre

ece

Hun

gary

Icel

and

Irel

and

Italy

Latv

ia

Lith

uani

a

Luxe

mb.

Mac

edon

ia

Mal

ta

Net

herla

.

Nor

way

Pol

and

Por

tuga

l

Rom

ania

Rus

sia

Ser

bia

Slo

vak

Rep

.

Slo

veni

a

Spa

in

Sw

eden

Sw

itzer

l.

Tur

key

Ukr

aine

UK

Albania - 1 1 1 1 0 1 0 0 0 1 0 1 1 0 0 1 1 0 0 1 1 1 1 1 0 1 1 1 0 1 0 1 1 1 0 0

Austria 1 - 1 1 1 1 1 1 1 1 1 1 1 1 0 1 1 1 1 1 1 1 1 1 1 1 1 1 0 1 1 1 1 1 1 1 1

Belgium 1 1 - 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

Bulgaria 1 1 1 - 1 1 1 1 1 1 1 1 1 1 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

Croatia 1 1 1 1 - 0 1 1 1 1 1 1 1 1 0 1 1 1 1 0 1 1 1 1 1 0 1 1 1 1 1 1 1 1 1 1 1

Cyprus 0 1 1 1 0 - 1 1 0 0 1 1 1 1 0 1 1 0 0 0 1 1 0 1 1 0 1 1 1 1 1 0 1 0 0 1 1

Czech R. 1 1 1 1 1 1 - 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

Denmark 0 1 1 1 1 1 1 - 1 1 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 0 1 1 1 1 1

Estonia 0 1 1 1 1 0 1 1 - 1 1 1 1 1 1 1 1 1 1 1 0 1 1 1 1 1 1 0 0 1 1 1 1 1 1 1 1

Finland 0 1 1 1 1 0 1 1 1 - 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 0 1 1 1 1 1 1 1 1

France 1 1 1 1 1 1 1 0 1 1 - 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

Germany 0 1 1 1 1 1 1 1 1 1 1 - 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

Greece 1 1 1 1 1 1 1 1 1 1 1 1 - 1 1 1 1 1 1 1 0 1 1 1 1 1 1 1 0 1 1 1 1 1 1 1 1

Hungary 1 1 1 1 1 1 1 1 1 1 1 1 1 - 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

Iceland 0 0 1 0 0 0 1 1 1 1 1 1 1 1 - 1 1 1 1 1 0 1 1 1 1 1 1 1 0 1 0 1 1 1 0 1 1

Ireland 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 - 1 1 1 1 0 0 1 1 1 1 1 1 0 1 1 1 1 1 0 0 1

Italy 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 - 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

Latvia 1 1 1 1 1 0 1 1 1 1 1 1 1 1 1 1 1 - 1 1 1 1 1 1 1 1 1 0 1 1 1 1 1 1 1 1 1

Lithuania 0 1 1 1 1 0 1 1 1 1 1 1 1 1 1 1 1 1 - 1 1 1 1 1 1 1 1 1 0 1 1 1 1 1 1 1 1

Luxemb. 0 1 1 1 0 0 1 1 1 1 1 1 1 1 1 1 1 1 1 - 0 1 1 1 1 1 1 1 0 1 1 1 1 1 1 0 1

Macedonia 1 1 1 1 1 1 1 1 0 1 1 1 0 1 0 0 1 1 1 0 - 0 1 1 1 0 1 1 1 1 1 1 1 1 1 1 1

Malta 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 0 1 1 1 1 0 - 1 1 1 1 1 0 0 1 1 1 1 0 0 0 1

Netherla. 1 1 1 1 1 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 - 1 1 1 1 1 1 1 1 1 1 1 1 1 1

Norway 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 0 1 1 - 1 1 1 1 0 1 1 1 1 1 1 1 1

Poland 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 - 1 1 1 0 1 1 1 1 1 1 1 1

Portugal 0 1 1 1 0 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 0 1 1 1 1 - 1 1 0 1 1 1 1 1 1 1 1

Romania 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 - 1 1 1 1 1 1 1 1 1 1

Russia 1 1 1 1 1 1 1 1 0 1 1 1 1 1 1 1 1 0 1 1 1 0 1 1 1 1 1 - 1 1 1 1 1 1 1 1 1

Serbia 1 0 1 1 1 1 1 1 0 1 1 1 0 1 0 0 1 1 0 0 1 0 1 1 1 0 1 1 - 1 1 0 1 1 1 1 1

Slovak R. 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 - 1 1 1 1 1 1 1

Slovenia 0 1 1 1 1 1 1 1 1 1 1 1 1 1 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 - 1 1 1 1 1 1

Spain 0 1 1 1 1 0 1 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 0 1 1 - 1 1 1 1 1

Sweden 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 - 1 1 1 1

Switzerl. 1 1 1 1 1 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 0 1 1 1 1 1 1 1 1 1 1 1 - 0 1 1

Turkey 1 1 1 1 1 0 1 1 1 1 1 1 1 1 0 0 1 1 1 1 1 0 1 1 1 1 1 1 1 1 1 1 1 0 - 1 1

Ukraine 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 0 1 1 1 0 1 0 1 1 1 1 1 1 1 1 1 1 1 1 1 - 1

UK 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 -

Home:

Host:

24

Table 1.2

Non-Resident Withholding Tax Rates on Dividends in 2009

Note: Non-resident withholding tax rates for both treaty and non-treaty specific country-pairs in 2009. In case a reduced withholding tax rate is provided for qualifying participations, the reduced one is taken. Parent-Subsidiary directive applies between the EU member states and other third countries adopting it. Source: Ernst & Young Worldwide Corporate Tax Guides, Eur-Lex and websites of various fiscal authorities.

Alb

ania

Aus

tria

Bel

gium

Bul

garia

Cro

atia

Cyp

rus

Cze

ch R

.

Den

mar

k

Est

onia

Fin

land

Fra

nce

Ger

man

y

Gre

ece

Hun

gary

Icel

and

Irel

and

Italy

Latv

ia

Lith

uani

a

Luxe

mb.

Mac

edon

ia

Mal

ta

Net

herla

.

Nor

way

Pol

and

Por

tuga

l

Rom

ania

Rus

sia

Ser

bia

Slo

vak

Rep

.

Slo

veni

a

Spa

in

Sw

eden

Sw

itzer

l.

Tur

key

Ukr

aine

UK

Albania - 5 5 5 10 10 5 10 10 10 5 10 5 5 10 10 10 5 10 10 10 5 0 5 5 10 10 10 5 10 5 10 5 5 5 10 10

Austria 5 - 0 0 0 0 0 0 0 0 0 0 0 0 25 0 0 0 0 0 0 0 0 0 0 0 0 5 25 0 0 0 0 0 25 5 0

Belgium 5 0 - 0 5 0 0 0 0 0 0 0 0 0 5 0 0 0 0 0 10 0 0 0 0 0 0 10 10 0 0 0 0 0 15 5 0

Bulgaria 5 0 0 - 5 0 0 0 0 0 0 0 0 0 10 0 0 0 0 0 5 0 0 0 0 0 0 15 5 0 0 0 0 0 10 5 0

Croatia 0 0 0 0 - 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Cyprus 0 0 0 0 0 - 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Czech R. 5 0 0 0 5 0 - 0 0 0 0 0 0 0 5 0 0 0 0 0 5 0 0 0 0 0 0 10 10 0 0 0 0 0 10 5 0

Denmark 28 0 0 0 5 0 0 - 0 0 0 0 0 0 0 0 0 0 0 0 5 0 0 0 0 0 0 10 5 0 0 0 0 0 15 5 0

Estonia 0 0 0 0 0 0 0 0 - 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Finland 28 0 0 0 5 0 0 0 0 - 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 5 28 0 0 0 0 0 15 5 0

France 5 0 0 0 0 0 0 0 0 0 - 0 0 0 5 0 0 0 0 0 0 0 0 0 0 0 0 10 5 0 0 0 0 0 15 5 0

Germany 25 0 0 0 5 0 0 0 0 0 0 - 0 0 5 0 0 0 0 0 15 0 0 0 0 0 0 5 15 0 0 0 0 0 15 5 0

Greece 0 0 0 0 0 0 0 0 0 0 0 0 - 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Hungary 0 0 0 0 0 0 0 0 0 0 0 0 0 - 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Iceland 15 15 5 15 15 15 5 0 5 0 5 5 5 5 - 5 5 5 5 5 15 5 0 0 5 10 5 5 15 5 15 5 0 5 15 5 5

Ireland 20 0 0 0 0 0 0 0 0 0 0 0 0 0 0 - 0 0 0 0 20 0 0 0 0 0 0 0 20 0 0 0 0 0 20 20 0

Italy 10 0 0 0 10 0 0 0 0 0 0 0 0 0 5 0 - 0 0 0 5 0 0 0 0 0 0 5 10 0 0 0 0 0 15 5 0

Latvia 5 0 0 0 5 0 0 0 0 0 0 0 0 0 5 0 0 - 0 0 5 0 0 0 0 0 0 10 5 0 0 0 0 0 10 5 0

Lithuania 15 0 0 0 5 0 0 0 5 0 0 0 0 0 5 0 0 0 - 0 0 0 0 0 0 0 0 5 15 0 0 0 0 0 10 5 0

Luxemb. 15 0 0 0 15 0 0 0 0 0 0 0 0 0 5 0 0 0 0 - 15 0 0 0 0 0 0 10 15 0 0 0 0 0 5 15 0

Macedonia 10 0 10 5 5 10 5 5 10 0 0 15 10 5 10 10 5 5 0 10 - 10 15 15 5 10 5 10 5 5 5 5 0 5 5 5 0

Malta 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 - 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Netherla. 5 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 - 0 0 0 0 5 5 0 0 0 0 0 5 5 0

Norway 5 0 0 0 15 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 25 0 0 - 0 0 0 10 25 0 0 0 0 0 20 5 0

Poland 5 0 0 0 5 0 0 0 0 0 0 0 0 0 5 0 0 0 0 0 5 0 0 0 - 0 0 10 19 0 0 0 0 0 10 5 0

Portugal 20 0 0 0 20 0 0 0 0 0 0 0 0 0 10 0 0 0 0 0 20 0 0 0 0 - 0 10 20 0 0 0 0 0 5 10 0

Romania 10 0 0 10 5 0 0 0 0 0 0 0 0 0 10 0 0 0 0 0 5 0 0 0 0 0 - 15 10 0 0 0 0 0 15 10 0

Russia 10 5 10 15 5 5 10 10 15 5 5 5 5 10 5 10 5 15 5 10 10 15 5 10 10 10 15 - 5 10 10 5 5 5 10 5 10

Serbia 5 20 10 5 5 10 10 5 20 5 5 15 20 5 20 20 10 5 20 20 5 20 5 15 5 20 10 5 - 5 5 20 5 5 5 5 5

Slovak R. 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 - 0 0 0 0 0 0 0

Slovenia 15 0 0 0 5 0 0 0 0 0 0 0 0 0 15 0 0 0 0 0 5 0 0 0 0 0 0 10 5 0 - 0 0 0 10 5 0

Spain 18 0 0 0 0 0 0 0 0 0 0 0 0 0 5 0 0 0 0 0 5 0 0 0 0 0 0 10 18 0 0 - 0 0 15 18 0

Sweden 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 - 0 0 0 0

Switzerl. 5 0 0 0 5 0 0 0 0 0 0 0 0 0 5 0 0 0 0 0 5 0 0 0 0 0 0 5 5 0 0 0 0 - 35 5 0

Turkey 5 25 15 10 10 15 10 15 10 15 15 15 15 10 15 15 15 10 10 10 5 15 10 25 10 5 15 10 5 5 10 5 15 15 - 10 15

Ukraine 15 5 5 5 5 0 5 5 5 5 5 5 5 5 5 15 5 5 5 15 5 15 5 5 5 10 10 5 5 10 5 15 5 5 10 - 5

UK 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 -

Home:

Host:

25

Even though some countries adopt the same foreign income tax system

regardless of the location of the subsidiaries (e.g. Germany and the United

Kingdom), many others implement a more generous tax relief system when a

tax treaty takes place (e.g. Spain, Czech Republic, Russia).

To briefly illustrate international double taxation, consider a multinational

M located in country p with a foreign subsidiary located in country s. The

subsidiary company is subject to taxation in country s, where the earnings are

obtained (see Table 1.3 for corporate tax rates of countries under analyses).

Dividends are also subject to a non-resident withholding tax rate in the host

country at the time of repatriation. Such a rate varies according to where

dividends are repatriated, and specifically if the recipient is either a treaty or a

non-treaty country. For the example, the combined corporate tax rate (��) and

withholding tax rate (��) in the host country is 1 − (1 − ��)(1 − ��), or

simply �� + �� − �� (Huizinga et al., 2008). Considering that s is Russia

and p is Austria, knowing that �� and �� in 2009 is 24 per cent and 5 per

cent respectively, the combined tax in the host country would be 27.8 per cent

(i.e. 24 + 5 − 24 ∗ 5).

Continuing with the example, if the parent country p adopts a residence-

based taxation instead of source-based taxation regime, dividends will also be

taxed in the parent country. The identification and the definition of each of the

foreign income tax systems are given in Table 1.4 (Appendix B provides by

country the foreign income tax systems in place).

Previous studies examined the effects of bilateral tax treaties using a

binary variable, which takes the value 1 if a treaty is effective between host and

home countries and 0 otherwise. This essay, even though uses a dummy to

denote the presence of a tax treaty, it proposes a tax rate measure which

intends to capture features of tax treaties regarding withholding tax rates and

double-taxation relief. As bilateral tax treaties change applicable withholding tax

rates on dividends and foreign income tax systems of the contracting countries,

an effective tax rate is used which reflects these changes, and thus the

presence of a bilateral tax treaty. Furthermore, such measure also uses another

important tax instrument: the host country´s corporate tax rate. The effective tax

26

rate is the one proposed by Huizinga et al. (2008). Table 1.4 describes the

calculation of the effective tax rate on income earned by a parent company

under each double-taxation relief system.

Table 1.3

Corporate Tax Rates

Note: Combined (central and local) statutory corporate income tax rates. When more than one rate-level in central tax rate exists, the highest level is taken. Source: OECD Tax Database and Ernst & Young’s and KPMG’s corporate tax guides.

Under the exemption system, the overall tax burden is only borne in the

subsidiary country. Considering the above example, dividends repatriated from

subsidiaries located in Russia are exempt in Austria. Consequently, the

Country 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Albania 25 25 25 25 25 23 20 20 10 10

Austria 34 34 34 34 34 25 25 25 25 25

Belgium 40.2 40.2 40.2 33.99 33.99 33.99 33.99 33.99 33.99 33.99

Bulgaria 37 32.5 28 23.5 19.5 15 15 15 10 10

Croatia 35 35 20 20 20 20 20 20 20 20

Cyprus 25 25 25 15 15 10 10 10 10 10

Czech R. 31 31 31 31 28 26 24 24 21 20

Denmark 32 30 30 30 30 28 28 25 25 25

Estonia 26 26 26 26 26 24 23 22 21 21

Finland 29 29 29 29 29 26 26 26 26 26

France 37.76 36.46 35.43 35.43 35.43 34.95 34.43 34.43 34.43 34.43

Germany 43.28 38.9 38.9 39.59 38.9 38.9 38.9 38.9 30.18 30.18

Greece 35 40 35 35 35 32 29 25 25 25

Hungary 18 18 18 18 16 16 17,33 20 20 20

Iceland 30 30 18 18 18 18 18 18 15 15

Ireland 24 20 16 12.5 12.5 12.5 12.5 12.5 12.5 12.5

Italy 37 36 36 34 33 33 33 33 27,5 27,5

Latvia 25 25 22 19 15 15 15 15 15 15

Lithuania 24 24 24 15 15 15 15 15 15 20

Luxembourg 37.5 37.5 30.38 30.38 30.38 30.38 29.63 29.63 29.63 28.59

Macedonia 15 15 15 15 15 15 15 15 10 10

Malta 35 35 35 35 35 35 35 35 35 35

Netherlands 35 35 34.5 34.5 34.5 31.5 29.6 25.5 25.5 25.5

Norway 28 28 28 28 28 28 28 28 28 28

Poland 30 28 28 27 19 19 19 19 19 19

Portugal 35.2 35.2 33 33 27.5 27.5 27.5 26.5 26.5 26.5

Romania 38 25 25 25 25 16 16 16 16 16

Russia 35 35 24 24 24 24 24 24 24 24

Serbia 20 20 20 14 14 10 10 10 10 10

Slovak R. 29 29 25 25 19 19 19 19 19 19

Slovenia 25 25 25 25 25 25 25 23 22 21

Spain 35 35 35 35 35 35 35 32.5 30 30

Sweden 28 28 28 28 28 28 28 28 28 26.3

Switzerland 24.9 24.7 24.4 24.1 24.1 24.1 21.32 21.32 21.17 21.17

Turkey 33 33 33 33 30 30 20 20 20 20

Ukraine 30 30 30 25 25 25 25 25 25 25

UK 30 30 30 30 30 30 30 30 28 28

27

effective tax rate on income earned by the parent company located in Austria in

2009 is again 27.8 per cent.

Table 1.4

Foreign Income Tax Systems and Calculation of Effective Tax Rates

Note: The identified systems are applicable in home countries to dividends repatriated by foreign subsidiaries. ��, and �� represent host country´s corporate tax rate and non-resident withholding tax rate respectively. �� denotes home country´s corporate tax rate. Source: Huizinga et al. (2008) and Barrios et al. (2012).

Indirect credit is another foreign income system. Under this method,

dividends of subsidiaries are taxed when repatriated to the parent country.

However, the parent company receives a tax credit, which may be used against

its tax liability, equal to corporate income and withholding tax rates paid abroad.

For instance, consider a parent company located in Norway and its subsidiary

located in Belgium. Norway adopts the indirect tax credit to tax foreign income.

Under the indirect system, the effective tax rate is seen to be max��; �� +�� − ��; thus the effective tax rate in 2009 is 33.99 per cent (i.e.

max�28; 33.99 0 � 33.99 ∗ 0�. In the case of direct tax credit, the calculation is similar; however, in this

system the parent company only gains a credit on the non-resident withholding

tax rate paid. Portugal adheres to a direct system regardless of whether or not

there is an effective treaty in force with a given host country. If, for instance, a

Portuguese parent firm has a subsidiary located in Spain, the effective tax rate

28

borne by the parent would be �� (1 � ��)max[��",��. Assuming that

the EU Parent-Subsidiary directive applies, the effective tax rate in 2009 would

be 48.55 per cent.

Few countries adopt a system under which foreign income is taxed in the

parent country and where foreign tax deductions on taxable income in the

parent company are allowed. In the sample, the Czech Republic is the only

European country adopting the deduction system for dividends repatriated to

parents located in non-treaty countries. Considering that a Czech multinational

has a subsidiary located in a non-treaty country (such as Turkey) in 2003, the

effective tax rate would be 1 � (1 � 33%)(1 − 10%)(1 − 31%); that is, 58.39 per

cent.

Finally, some countries using a worldwide taxation regime do not provide

any foreign tax relief. In such cases, tax payments on subsidiaries will not be

used against parent company liability. Then, a subsidiary will be taxed in the

host country; the dividends repatriated to the home country will also be taxed in

the host country (non-residents withholding tax rate) and in the home country

(corporate tax rate) as well. For such home countries, the effective tax rate is

the one provided in Table 1.4.

Following the above approach, the country-pairs specific effective tax

rates per year are computed. Table 1.5 provides the effective tax rates by

country-pair for 2009 (Appendix C displays the computed effective tax rates for

the remaining period of 2000-2008).

The effective tax rate for treaty and non-treaty country-pairs are on

average 30 and 40 per cent respectively. Over the sample period, the rate

dropped from 39.4 to 26.9 per cent.

29

Table 1.5

Effective Tax Rates in 2009

Note: Effective tax rate was computed considering provisions of tax treaties, specifically regarding non-resident withholding tax rates, double-taxation relief systems, as well as host country´s corporate tax rate. For tax treaties adhering to foreign tax systems other than exemption, the home country´s corporate tax rate is also considered. The table´s rows correspond to host countries; the columns correspond to the home countries.

Alb

ania

Aus

tria

Bel

gium

Bul

garia

Cro

atia

Cyp

rus

Cze

ch R

.

Den

mar

k

Est

onia

Fin

land

Fra

nce

Ger

man

y

Gre

ece

Hun

gary

Icel

and

Irel

and

Italy

Latv

ia

Lith

uani

a

Luxe

mb.

Mac

edon

ia

Mal

ta

Net

herla

.

Nor

way

Pol

and

Por

tuga

l

Rom

ania

Rus

sia

Ser

bia

Slo

vak

Rep

.

Slo

veni

a

Spa

in

Sw

eden

Sw

itzer

l.

Tur

key

Ukr

aine

UK

Albania - 14.5 16.2 14.5 19 19 20 19 19 33.4 16.2 20.5 25 14.5 19 19 20.4 14.5 19 19 19 35 10 28 19 33.9 19 31.6 14.5 19 14.5 30 14.5 14.5 20 44 28Austria 28.8 - 26.7 25 25 25 25 25 25 25 26.7 26.5 25 25 43.8 25 26.4 25 25 25 32.5 35 25 28 25 44.9 25 43 43.8 25 25 25 25 25 43.8 43.8 28Belgium 37.3 34 - 34 37.3 34 34 34 34 34 35.7 35.5 34 34 37.3 34 35.4 34 34 34 40.6 35 34 34 34 51.5 34 49.8 40.6 34 34 34 34 34 43.9 50.5 34Bulgaria 14.5 10 11.7 - 14.5 10 20 10 10 10 11.7 11.5 25 10 19 12.5 11.4 10 10 10 19 35 10 28 19 33.9 16 31.6 14.5 10 10 10 10 10 20 32.5 28Croatia 20 20 21.7 20 - 20 20 20 20 20 21.7 21.5 25 20 20 20 21.4 20 20 20 28 35 20 28 20 41.2 20 39.2 20 20 20 20 20 20 20 40 28Cyprus 20 10 11.7 10 10 - 20 10 10 33.4 11.7 11.5 25 10 10 12.5 11.4 10 10 10 19 35 10 28 19 33.9 16 31.6 10 10 10 30 10 10 28 32.5 28Czech R. 24 20 21.7 20 24 20 - 20 20 20 21.7 21.5 25 20 24 20 21.4 20 20 20 28 35 20 28 20 41.2 20 39.2 28 20 20 20 20 20 28 40 28Denmark 56 25 26.7 25 28.8 25 25 - 25 25 26.7 26.5 25 25 25 25 26.4 25 25 25 32.5 35 25 28 25 44.9 25 43 28.8 25 25 30 25 25 36.3 43.8 28Estonia 31 21 22.7 21 21 21 21 21 - 21 22.7 22.5 25 21 21 21 22.4 21 21 21 28.9 35 21 28 21 41.9 21 45 21 21 21 21 21 21 21 40.8 28Finland 56.7 26 27.7 26 29.7 26 26 26 26 - 27.7 27.5 26 26 26 26 27.4 26 26 26 33.4 35 26 28 26 45.6 26 43.8 46.7 26 26 26 26 26 37.1 44.5 28France 37.7 34.4 36.1 34.4 34.4 34.4 34.4 34.4 34.4 34.4 - 35.9 34.4 34.4 37.7 34.4 35.8 34.4 34.4 34.4 41 35 34.4 34.4 34.4 51.8 34.4 50.3 37.7 34.4 34.4 34.4 34.4 34.4 44.3 50.8 34.4Germany 57.6 30.2 31.9 30.2 33.4 30.2 30.2 30.2 30.2 30.2 31.9 - 30.2 30.2 33.7 30.2 31.6 30.2 30.2 30.2 40.7 35 30.2 30.2 30.2 48.7 30.2 46.9 40.7 30.2 30.2 30.2 30.2 30.2 40.7 47.6 30.2Greece 25 25 26.7 25 25 25 25 25 25 25 26.7 26.5 - 25 25 25 26.4 25 25 25 32.5 35 25 28 25 44.9 25 43 25 25 25 25 25 25 25 43.8 28Hungary 20 20 21.7 20 20 20 20 20 20 20 21.7 21.5 25 - 20 20 21.4 20 20 20 28 35 20 28 20 41.2 20 39.2 20 20 20 20 20 20 20 40 28Iceland 37.8 27.8 20.9 27.8 27.8 27.8 20 15 19.3 15 21 20.8 25 19.3 - 19.3 20.6 19.3 19.3 19.3 27.8 35 15 28 19.3 37.5 19.3 35.4 27.8 19.3 27.8 19.3 15 19.3 32 36.3 28Ireland 40 12.5 14.2 12.5 12.5 12.5 20 12.5 12.5 12.5 14.2 14 25 12.5 12.5 - 13.9 12.5 12.5 12.5 30 35 12.5 28 19 35.7 16 33.5 30 12.5 12.5 12.5 12.5 12.5 30 55 28Italy 34.8 27.5 29.2 27.5 34.8 27.5 27.5 27.5 27.5 27.5 29.2 29 27.5 27.5 31.1 27.5 - 27.5 27.5 27.5 34.8 35 27.5 28 27.5 46.7 27.5 44.9 34.8 27.5 27.5 27.5 27.5 27.5 38.4 45.6 28Latvia 19.3 15 16.7 15 19.3 15 20 15 15 15 16.7 16.5 25 15 19.3 15 16.4 - 15 15 23.5 35 15 28 19 37.5 16 47.5 19.3 15 15 15 15 15 23.5 36.3 28Lithuania 42 20 21.7 20 24 20 20 20 24 20 21.7 21.5 25 20 24 20 21.4 20 - 20 28 35 20 28 20 41.2 20 39.2 32 20 20 20 20 20 28 40 28Luxemb. 49.3 28.6 30.3 28.6 39.3 28.6 28.6 28.6 28.6 28.6 30.3 30 28.6 28.6 32.2 28.6 30 28.6 28.6 - 39.3 35 28.6 28.6 28.6 47.5 28.6 45.7 39.3 28.6 28.6 28.6 28.6 28.6 32.2 64.3 28.6Macedonia 19 10 20.7 14.5 14.5 19 20 14.5 19 10 11.7 25 25 14.5 19 19 15.9 14.5 10 19 - 35 23.5 28 19 33.9 16 31.6 14.5 14.5 14.5 14.5 10 14.5 20 32.5 28Malta 35 35 36.7 35 35 35 35 35 35 35 36.7 36.5 35 35 35 35 36.4 35 35 35 41.5 - 35 35 35 52.2 35 59 35 35 35 35 35 35 48 60 35Netherla. 29.2 25.5 27.2 25.5 25.5 25.5 25.5 25.5 25.5 25.5 27.2 27 25.5 25.5 25.5 25.5 26.9 25.5 25.5 25.5 33 35 - 28 25.5 45.2 25.5 43.4 29.2 25.5 25.5 25.5 25.5 25.5 29.2 44.1 28Norway 31.6 28 29.7 28 38.8 28 28 28 28 28 29.7 29.5 28 28 28 28 29.4 28 28 28 46 35 28 - 28 47.1 28 45.3 46 28 28 28 28 28 42.4 46 28Poland 23.1 19 20.7 19 23.1 19 20 19 19 19 20.7 20.5 25 19 23.1 19 20.4 19 19 19 27.1 35 19 28 - 40.5 19 38.4 34.4 19 19 19 19 19 27.1 39.3 28Portugal 51.2 26.5 28.2 26.5 41.2 26.5 26.5 26.5 26.5 26.5 28.2 28 26.5 26.5 33.9 26.5 27.9 26.5 26.5 26.5 41.2 35 26.5 28 26.5 - 26.5 44.1 41.2 26.5 26.5 26.5 26.5 26.5 30.2 44.9 28Romania 24.4 16 17.7 24.4 20.2 16 20 16 16 16 17.7 17.5 25 16 24.4 16 17.4 16 16 16 24.4 35 16 28 19 38.3 - 36.2 24.4 16 16 16 16 16 28.6 37 28Russia 31.6 27.8 33.3 35.4 27.8 27.8 31.6 31.6 35.4 27.8 29.5 29.3 27.8 31.6 27.8 31.6 29.2 35.4 27.8 31.6 31.6 35.4 27.8 31.6 31.6 44.1 35.4 - 27.8 31.6 31.6 27.8 27.8 27.8 31.6 43 31.6Serbia 14.5 28 20.7 14.5 14.5 19 20 14.5 28 14.5 16.2 25 28 14.5 28 28 20.4 14.5 28 28 19 35 14.5 28 19 33.9 19 31.6 - 14.5 14.5 30 14.5 14.5 20 32.5 28Slovak R. 29 19 20.7 19 19 19 20 19 19 19 20.7 20.5 25 19 19 19 20.4 19 19 19 27.1 35 19 28 19 40.5 19 38.4 19 - 19 19 19 19 20 39.3 28Slovenia 42.9 21 22.7 21 25 21 21 21 21 21 22.7 22.5 25 21 32.9 21 22.4 21 21 21 28.9 35 21 28 21 41.9 21 40 25 21 - 21 21 21 28.9 40.8 28Spain 52.6 30 31.7 30 30 30 30 30 30 30 31.7 31.5 30 30 33.5 30 31.4 30 30 30 37 35 30 30 30 48.6 30 46.8 42.6 30 30 - 30 30 40.5 47.5 30Sweden 26.3 26.3 28 26.3 26.3 26.3 26.3 26.3 26.3 26.3 28 27.8 26.3 26.3 26.3 26.3 27.7 26.3 26.3 26.3 33.7 35 26.3 28 26.3 45.8 26.3 44 26.3 26.3 26.3 26.3 - 26.3 26.3 44.7 28Switzerl. 25.1 21.2 22.9 21.2 25.1 21.2 21.2 21.2 21.2 21.2 22.9 22.7 25 21.2 25.1 21.2 22.5 21.2 21.2 21.2 29.1 35 21.2 28 21.2 42.1 21.2 40.1 25.1 21.2 21.2 21.2 21.2 - 48.8 40.9 28Turkey 24 40 33.7 28 28 32 28 32 28 32 33.7 33.5 32 28 32 32 33.4 28 28 28 28 35 28 40 28 41.2 32 39.2 24 24 28 24 32 32 - 40 32Ukraine 46.3 28.8 30.5 28.8 28.8 25 28.8 28.8 28.8 28.8 30.5 30.3 28.8 28.8 28.8 36.3 30.1 28.8 28.8 36.3 32.5 36.3 28.8 28.8 28.8 44.9 32.5 43 28.8 32.5 28.8 36.3 28.8 28.8 32.5 - 28.8UK 38 28 29.7 28 28 28 28 28 28 28 29.7 29.5 28 28 28 28 29.4 28 28 28 35.2 35 28 28 28 47.1 28 45.3 28 28 28 28 28 28 28 46 -

Home:

Host:

30

1.4 Data and research methodology

Most of the previous studies on investment location decisions use binary

outcome models (e.g. Devereux and Griffith, 1998; Buettner and Ruf, 2007;

Davies et al., 2009; Barrios et al., 2012). The present research uses count data

models, where the dependent variable is a count of new foreign subsidiaries.

The main advantage of the latter concept is that it contains more information

than a binary variable (Overesch and Wamser, 2010). The analysis consists on

testing the effects of bilateral tax treaties on the number of new subsidiaries

incorporated in Europe.

1.4.1 Data and descriptive statistics

Data from foreign subsidiaries in 37 European countries was collected from the

Amadeus database. A new foreign subsidiary is considered if it is owned by an

ultimate owner, or if there is a shareholder holding at least 50 per cent of the

subsidiary’s capital, and if its incorporation date was between 2000 and 2009.

Table 1.6 displays the number of new foreign subsidiaries by both host and

home countries over the sample period. A shareholder may be majority-owned

by another European shareholder.

Throughout the period mentioned above, the total number of new foreign

subsidiaries is 70,884. Germany and the United Kingdom are the main host

countries, with more than 25 per cent of new foreign subsidiaries, and are home

to around 22 per cent of parent companies. They are followed as host countries

by Poland, Romania, Italy and the Czech Republic; more than 50 per cent of

new subsidiaries incorporated between 2000 and 2009 are located in one of

these countries. The most representative home countries are Germany and the

Netherlands, each one with around 13 per cent of new subsidiaries.

Switzerland, Denmark, Italy, Sweden and the United Kingdom are home to

around 36 per cent of total parent companies.

31

Table 1.6

Number of New Foreign Subsidiaries between 2000 and 2009

Source: Amadeus database.

by host country by home country

Albania 147 1Austria 2,415 3,906Belgium 949 3,012Bulgaria 281 59Croatia 559 166Cyprus 605 1,743Czech R. 3,829 484Denmark 1,303 4,037Estonia 1,054 367Finland 888 1,710France 3,741 2,417Germany 11,606 9,765Greece 282 249Hungary 386 157Iceland 82 181Ireland 1,342 915Italy 4,348 5,125Latvia 814 203Lithuania 524 185Luxembourg 723 2,570Macedonia 25 10Malta 199 163Netherlands 3,717 9,409Norway 1,511 2,141Poland 5,233 401Portugal 830 615Romania 5,148 69Russia 2,323 136Serbia 910 26Slovak R. 694 325Slovenia 322 292Spain 3,680 3,043Sweden 1,689 4,047Switzerland 1,569 6,557Turkey 46 87Ukraine 472 2UK 6,638 6,309

Total 70,884 70,884

Number of subsidiaries

32

The host country’s corporate tax rate - ℎ&��'() - is taken as an

explanatory variable. This data was collected mainly from the OECD Tax

Database, and consists of a basic, combined central and local corporate tax

rates. When there is more than one rate level in the central tax rate, the highest

level is considered. The corporate taxation in host country exerts a deterrent

effect on foreign investment (see for example De Mooij and Ederveen, 2003,

2006; Devereux, 2006). Consequently, a negative and significant association

between this variable and the number of new subsidiaries is expected. In

addition to the host country’s tax rate, the corporate tax rate of the parent

(ℎ&*+'()) may also influence bilateral investment.

As in previous studies, a dummy variable is used - (�+,�- - which takes

the value of 1 if a given country-pair has an effective bilateral tax treaty and 0 if

otherwise. The construction of the tax treaty network is based mainly on the

International Bureau of Fiscal Documentation (IBFD) database and Ernst &

Young’s Worldwide Corporate Tax Guides.

Here, one should mention that there are two different moments in the

implementation of a tax treaty agreement: the period in which the treaty enters

into force after having being signed and ratified on a national level; and the one

in which the tax treaty becomes effective, usually occurring in the following

year(s) of entering into force. The tax treaty network was developed using the

year in which the agreement became effective. On the one hand, these

agreements mitigate international double taxation and reduce tax uncertainty,

which may decrease tax distortion of investments; on the other hand, the

additional information exchange may increase tax burden, given that its

avoidance becomes more difficult. Therefore, the sign of the coefficient variable

is difficult to predict.

The effects of non-resident withholding tax rates on dividends in the host

country - .() - are tested. For this variable a negative coefficient is

anticipated. This data comes mainly from the Ernst & Young Worldwide

Corporate Tax Guides and Eur-Lex (for transposition date of the Parent-

Subsidiary directive). The sample consists of ultimate owners and multinationals

holding at least 50 per cent of the shares of the foreign subsidiaries. Hence,

33

when reduced withholding tax rates are provided for qualifying participations,

the reduced rate is considered. The Parent-Subsidiary directive applies

between the EU countries and non-EU countries adopting it (i.e. Norway and

Switzerland) from the year it became effective. In the particular case of the

country-pairs Denmark-France and Denmark-Spain, withholding tax rates

remain at zero, as Parent-Subsidiary directive applies regardless of the 2009

suspended tax treaty between these countries.

The effective tax rate variable - /() - enters the model to test whether

features of bilateral tax treaties exert effects on the number of new subsidiaries.

This variable reflects the most important components of international taxation

(e.g. non-resident withholding tax rate on dividends and home country’s double-

taxation relief system), which may be altered when a tax treaty becomes

effective (Table 1.5 displays the country-pairs’ /() in 2009). This variable is

expected to be negatively associated to number of new subsidiaries.

Among control variables, it is considered the potential market size, which

is proxied by the growth rate of GDP (0123). This data comes from the World

Bank database. A positive impact on the number of new subsidiaries is

predicted. The dummy variable /4 is included, which takes on the value 1 if the

host country is an EU member state.

Also the model controls for host country’s productivity, labour costs and

inflation rates. Data on productivity and inflation come from the World Bank

database, and real unit labour costs come from the Ameco database.

Productivity (2)51) is measured by dividing the host country´s GDP by the total

employment in the economy. Host country’s real unit labour costs (46') are

computed as the ratio of compensation per employee to nominal GDP per

person employed. For unit labour costs and inflation rates (7896), negative

coefficients are predicted, whereas positive ones are projected for productivity.

Descriptive statistics on the dependent, tax and control variables are

summarized in Table 1.7. As multinationals located in each of the 37 countries

may have investments in 36 other countries, the sample consists of 1,332

country-pairs in each year, of which 82 per cent have treaties in force. The

mean of host country’s corporate tax rate variable is 25.6 per cent. The mean

34

effective tax rate is 32.3 per cent; the corresponding mean computed by Barrios

et al. (2012) for the period 1999-2003 is 35.3 per cent.

Table 1.7

Descriptive Statistics

Note: Standard deviation, minimum and maximum corresponds to overall statistics. The standard number of observations per year is 1,332.

On average, the number of new subsidiaries in each country-pair is 5.32,

with minimum and maximum values of 0 and 428. Note that the overall mean of

the dependent variable (5.32) is significantly lower than the respective variance

(17.762), which places constraints on the choice of the methodology discussed

in the next section.

1.4.2 Research methodology

This essay examines the location decisions of multinational companies located

in 37 European countries over the period 2000-2009. More precisely, it is

analysed the extent to which bilateral tax treaties have impacts on the number

of new foreign subsidiaries incorporated in all 37 potential European countries.

The number of countries and years analysed allows to employ panel

methods. As in Egger et al. (2009), even though the time-variation in the

effective tax rates is small, it is enough to use a fixed effects approach. The

Variables N Mean Std. Dev. Min Max

Nsubs 13,320 5.3216 17.7573 0 428

Treaty 13,320 0.8171 0.3866 0 1

hostCTR 13,320 0.2558 0.0757 0.1 0.4328

WTR 13,253 0.0497 0.0687 0 0.35

ETR 13,253 0.3233 0.1043 0.1 0.864

GDP 13,320 25.4606 1.760 21.9579 28.9215

GDPg 13,320 0.030 0.0407 -0.1795 0.1223

Contiguity 13,320 0.0961 0.2947 0 1

EU 13,320 0.5838 0.4929 0 1

INFL 13,320 0.0521 0.0876 -0.045 0.950

ULC 11,520 98.8514 5.4502 74.99 115.44

PROD 12,960 10.3110 0.5195 8.73 10.96

35

implementation of fixed effects allows controlling for observable and

unobservable characteristics of the country-pairs (e.g. distance, origin of law,

cultural ties).

As the dependent variable is a count of new subsidiaries, the outcome is a

non-negative integer. The natural model for counts is the Poisson regression

(Cameron and Trivedi, 2010). The aim is to to model the number of new foreign

subsidiaries of parent-country p in host-country s; say country-pair i at time t,

:�;<�=", conditional on effective tax rate and control variables >=" and time-

invariant country-pair specific effects - ?=. One can express this using the

exponential function as a functional form /(:�;<�="|?=, >=") = B=" = exp(?= >′="F) (Hausman, Hall and Griliches, 1984, hereafter HHB, and Cameron and

Trivedi, 2005). The Poisson distribution, from which the Poison regression is

estimated, has the following probability function:

G(:�;<�=") = HIJKLMNLIJ�OPIJ��IJ! , :�;<� = 0,1,2, … ,8 (1)

As shown in Guimarães (2008, p. 63), after some algebra the ?= is

dropped out and the likelihood function can be maximized to obtain estimates

for the vector of coefficients F. In the Poisson regression with fixed effects, the

assumption that the conditional mean and conditional variance are equal

remains (equidispersion property). The specification test indicates the presence

of significant overdispersion. An alternative way to model this feature of the data

is using a conditional negative binomial model (see HHB, 1984, for the

parameterization of the model). Under the fixed effects negative binomial

(FENB) model, :�;<�=" is iid NB1 with parameters ?=B=" and S= (overdispersion),

where B=" = +TUIJV; therefore :�;<�=" has a mean of ?=B=" S=⁄ and a variance of

(?=B=" S=⁄ )(1 + ?= S=⁄ ) (Cameron and Trivedi, 2005, p. 806).

Allison and Waterman (2002) claimed, however, that HHB’s (1984)

formulation, implemented in the standard software packages, is not a ‘true fixed

effects method’, as it controls for individual-specific variation in the dispersion

parameter rather than in the conditional mean. Actually, HHB’s FENB assumes

that the fixed effects ?= equal the logarithm of the overdispersion parameter, S=

36

(Guimarães, 2008). If this condition is not met, the method does not control for

all observable and unobservable time-invariant individual heterogeneity.

More recently, Guimarães (2008) noted that FENB only controls individual

fixed effects in specific circumstances. Under FENB, the ?= will drop out only if

there is a specific functional relation between the individual fixed effects and the

individual overdispersion parameter (Guimarães, 2008, p. 64). Thus, he

suggests the implementation of a score test for the null hypothesis that ?= �ln(S=) is identical for all individuals. If the null hypothesis is accepted, then it

indicates that the model is controlling for both overdispersion and country-pair

specific effects. In the present study, the HHB’s FENB model is employed and

the test score - fenbtest - is implemented to check whether FENB is controlling

for country-pair fixed effects. Note that Guimarães (2008) recommends that for

a panel of 1,000 individuals, the test requires at least 20 observations per

individual so as to prevent a type I error. The sample comprises 1,332 country-

pairs observed for only 10 years each; thus the result of the fenbtest may be

interpreted with caution, as there is a probability of rejecting the null hypothesis

(when it is in fact true).

An alternative approach to fit the data would be to use the negative

binomial model and control for the country-pair fixed effects by introducing the

respective set of dummies. However, the explicit introduction of dummy

variables in the model is not possible, because the number of country-pairs is

too large. Then it is employed the estimation procedure proposed by Guimarães

and Portugal (2010). This iterative procedure enables fitting models with high-

dimensional fixed effects without having to explicitly introduce the country-pair

dummies. Specifically, it is implemented the algorithm extended to nonlinear

models, which is also provided by the authors.

The estimates generated by semilogarithmic regression equations allow

for the interpretation of coefficients as a proportionate change in the number of

new foreign subsidiaries of continuous independent variables. However,

transformation of the dummy coefficient (e.g. (�+,�-) is required for it to be

interpreted as the relative effect on the number of subsidiaries (cf. Halvorsen

and Palmquist, 1980).

37

1.5 Estimation results

This section presents and discusses the empirical results estimated using the

fixed effects negative binomial model as well as the iterative approach for the

estimation of non-linear models proposed by Guimarães and Portugal (2010).

Throughout all regressions the observation units are country-pairs.

1.5.1 Baseline results

The aim of this essay is to learn more about the bilateral tax treaty effects on

the location decisions of investment at the country level. To do so, a binary

variable is used, and alternatively the variable is replaced with an effective tax

rate which takes into account tax treaties and captures the main changes that

treaties introduce. The rationale for the introduction of this variable is to avoid

potentially confounding effects that emerge from the use of a binary variable.

The model is also run including the country-pairs’ specific effective tax rate

additionally to the tax treaty dummy variable, to test whether features of the

treaties - other than non-residents withholding tax rates and double-taxation

relief systems - have an effect on the number of new foreign subsidiaries set up

in the European context.

Before presenting the main regressions, each tax variable used to

compute the effective tax rate enters the model separately. Hence, the

regressions provided in Table 1.8 test the tax treaty binary variable isolated

from other tax variables (column 1), the host and home country corporate tax

rates (columns 2 and 3), and the withholding tax rates (columns 4).

The estimated coefficient of the variable (�+,�- is 0.340, being significant

at a 1 per cent level. The number of new foreign subsidiaries increases by 2.18

for those country-pairs with effective tax treaties. As far as corporate tax rates

are concerned, the estimated coefficients are -2.119 and -1.386 for host and

home countries respectively, being significant at a 1 per cent level. Finally, the

variable non-resident withholding tax rate enters with an estimated semi-

elasticity of -0.687, significant only at a 10 per cent level.

38

Table 1.8

Effects of Different Tax Instruments on the Number of New Foreign

Subsidiaries: Country-Pair Fixed Effects Negative Binomial

Note: The estimation uses the fixed effects negative binomial model. All regressions include country-pair fixed effects. Standard errors are in parentheses. The marginal effects are evaluated at the sample means of the regressors. The bottom of the table indicates the number of country-pairs observations and respective groups, the number of years, Wald test, pseudo-log-likelihood and Fenbtest score. ***, **, * indicate statistical significance at the 1, 5 and 10% level.

Variables (1) (2) (3) (4)

0.340***(0.102)

-2.119***(0.258)

-1.386***(0.293)

-0.687*(0.358)

3.063*** 3.536*** 3.449*** 3.048***(0.290) (0.289) (0.302) (0.289)

0.152*** 0.059 0.135*** 0.136***(0.037) (0.038) (0.037) (0.039)

0.332 0.511 0.254 0.376(0.325) (0.319) (0.323) (0.324)

-0.013*** -0.006** -0.009*** -0.012***(0.003) (0.003) (0.003) (0.003)

0.631*** 0.640*** 0.597*** 0.626***(0.100) (0.100) (0.100) (0.100)

-3.983*** -3.674*** -3.171*** -3.607***(1.019) (1.037) (1.038) (1.024)

Marginal effect

Treaty 2.182***hostCTR -15.653***homeCTR -9.830***WTR -4.491*

Number of observations 8,070 8,070 8,070 8,070Groups 807 807 807 807Observations per group 10 10 10 10Pseudo log-lokelihood -12,061.3 -12,033.8 -12,056.0 -12,056.0Wald test 374.35*** 452.60*** 393.38*** 393.38***p-value 0.000 0.000 0.000 0.000Fenbtest (with 807 df) 3,734.66*** 2,026.51*** 805.78 2.84e+05***

p-value 0.000 0.000 0.506 0.000

EU

INFL

ULC

PROD

Constant

Treaty

hostCTR

homeCTR

WTR

GDP

39

The above estimates suggest that, when analysed separately, almost all

the components of international taxation play a significant role in the location of

new foreign subsidiaries. An interesting result is that the location of new foreign

subsidiaries is responsive to the home country’s corporate tax rate. Such tax

sensitivity was also found by Barrios et al. (2012), and is likely to occur for

parent countries adhering to residence-based taxation, as under this system

foreign-source income is also taxed in the home country at the time of

repatriation (see also e.g. Voget, 2011).

To examine the extent to which tax treaties have impacts on foreign

investment (measured as the number of new foreign subsidiaries), the

commonly used binary variable (�+,�- is taken, which identifies treaty and non-

treaty country-pairs. Then it is introduced /(), which is intended to capture the

features of a tax treaty. The results are provided in Table 1.9.

Similar to the previous estimates, the results from Table 1.9 were obtained

using the negative binomial model with country-pair fixed effects. In regression

1, the estimated parameter on the variable (�+,�- has a value of 0.278, which

is statistically significant at any conventional level. As predicted, the estimated

coefficient of the host country’s tax rate enters negative, and is significant at a 1

per cent level of significance. The corresponding marginal effect of the number

of new foreign subsidiaries with respect to the tax treaty variable is 1.99. This

result suggests that for the country-pairs with tax treaties in force, a higher

number of new foreign subsidiaries is expected.

Regression 2 adds the withholding tax rate variable to the previous

specification. The coefficient of (�+,�- remains almost unchanged. Accordingly,

a new treaty country-pair is associated with a 32 per cent increase in the

number of new subsidiaries, corresponding to two new added foreign

subsidiaries. Also, the estimated host tax rate semi-elasticity is 2.06, suggesting

again a significant and negative association between the corporate tax rate and

the number of new subsidiaries. The estimated semi-elasticity of non-resident

withholding tax rate on dividends is 0.013; however, unlike in Table 1.8, the

variable here is not statistically significant.

40

Table 1.9

Effects of Tax Treaties on the Number of New Foreign Subsidiaries: Country-

Pair Fixed Effects Negative Binomial

Note: The estimation uses the fixed effects negative binomial. All regressions include country-pair fixed effects. Standard errors are in parentheses. The marginal effects are evaluated at the sample means of the regressors. The bottom of the table indicates the number of country-pairs observations, respective groups, number of years, Wald test, pseudo-log-likelihood and Fenbtest score. ***, **, * indicate statistical significance at the 1, 5 and 10% level.

Variables (1) (2) (3) (4)

0.278*** 0.278*** 0.241**(0.103) (0.103) (0.104)

-1.319*** -1.225***(0.222) (0.227)

-2.061*** -2.062***(0.259) (0.261)

0.013(0.368)

3.551*** 3.551*** 3.414*** 3.413***(0.289) (0.289) (0.294) (0.294)

0.054 0.054 0.088** 0.086(0.038) (0.040) (0.038) (0.039)

0.468 0.468 0.338 0.306(0.320) (0.320) (0.320) (0.321)

-0.006** -0.006** -0.008*** -0.008***(0.002) (0.003) (0.003) (0.003)

0.626*** 0.627*** 0.592*** 0.584***(0.100) (0.101) (0.099) (0.100)

-3.809*** -3.814*** -3.207*** -3.365***(1.040) (1.049) (1.030) (1.033)

Marginal effects

Treaty 1.990*** 1.998** 1.411**ETR -9.068*** -7.175***hostCTR -14.775*** -14.792***WTR 0.095

Number of observations 8,070 8,070 8,070 8,070Groups 807 807 807 807Observations per group 10 10 10 10Pseudo log-lokelihood -12,029.9 -12,029.9 -12,049.6 -12,046.8Wald test 458.26*** 458.27*** 407.72*** 411.66***p-value 0.000 0.000 0.000 0.000Fenbtest (with 807 df) 5,822.76*** 5,872.22*** 2,960.08*** 4,559.78***

p-value 0.000 0.000 0.000 0.000

EU

INFL

ULC

PROD

Constant

GDP

Treaty

ETR

hostCTR

WTR

41

These results indicate that tax treaties positively affect the number of new

foreign subsidiaries. Also, in line with previous literature, they suggest that the

corporate tax rate plays a significant role in location decisions. However, the

non-resident withholding tax rate on dividends does not seem to be meaningful

on the subsidiary location decision. A plausible explanation for this is that a

significant number of country-pairs in the sample involves EU member states,

whose withholding tax rates are zero due to the application of the EU Parent-

Subsidiary directive (Barrios et al., 2012).

Regression 3 introduces the /(), replacing both ℎ&��'() and .()

because the /() already comprises these variables in its construction. The

estimated parameter of this variable is -1.319, which is significant at a 1 per

cent level. In terms of marginal effects, if effective tax rate increases by 1

percentage point, a decrease of more than nine new subsidiaries is expected.

Note that a source-based tax system in the parent country implies an exemption

of the foreign-source income remitted by the subsidiary (e.g. in the form of

dividends). In these cases, the /() variable consists of the host country’s tax

rate as well as the non-resident withholding tax rate. Likewise, in the cases

where the parent country adheres to a foreign tax credit system, the remitted

dividends will be additionally taxed in the parent country if either the host

country’s tax rate plus the withholding tax rate is below the home country’s tax

rate (for indirect credit), or if the withholding tax rate is below the home

country’s tax rate (for direct credit). This means that generous foreign income

tax systems brought in by tax treaties are well reflected in the /() variable.

The above estimated tax treaty effects are slightly higher than those found

in previous literature. For instance, Davies et al. (2009) found that when a treaty

enters into force, the probability of investment increases by 0.1 per cent

(representing an increase of about 17 per cent on the probability of investment

mean); Egger and Merlo (2011) estimate an impact of 6.4 per cent on the

number of affiliates; and Barthel et al. (2010) find an impact of 27.3 per cent on

FDI stock. On the one hand, the results suggest an effect of 32 per cent on the

number of new subsidiaries when a dummy variable is taken; on the other hand,

a much higher semi-elasticity of -1.319 is evident when the effective tax rate is

used. The massive difference in the estimated impact is not surprising given

42

that the latter tax measure encompasses other international taxation features

(e.g. corporate and withholding tax rates).

Some previous literature, namely the one based on aggregated data of

foreign direct investment, fail to find significant effects of tax treaty agreements.

Blonigen and Davies (2004) suggest that this is due to the fact that positive and

negative aspects of treaty formation largely cancel each other out. One of the

main positive aspects of tax treaties is the reduction in the effective tax rate,

mainly as a result of withholding tax rates decreasing and due to the more

generous double-taxation relief system. Furthermore, literature points out other

possible roles for treaties - such as tax coordination, tax certainty, provisions to

avoid tax evasion and the promotion of exchange information - which may affect

foreign investment both positively and negatively (see Davies, 2004).

Regression 5 of Table 1.9 joins together /() and (�+,�-. The former

should reflect the reduction of tax burden induced by tax treaty formation, while

the latter (whose expected sign is unclear) should reflect the other features of

tax treaties. The parameter estimate for /() is -1.225. Although the coefficient

has decreased slightly, it is found to remain significant and to have the expected

sign. A 1 percentage point decrease in effective tax rate, is estimated to

increases the number of new foreign subsidiaries by 7.2. The estimated impact

of tax treaty features (apart from those comprised of effective tax rates) is also

found to be positive and statistically significant. The presence of a tax treaty

leads to a 27 per cent increase in new subsidiaries (corresponding to an

increase of 1.4 more new subsidiaries).

To summarize, the implementation of tax treaties seems to positively

impact the location decisions of new foreign subsidiaries. Even when the treaty

indicator variable is expurgated of provisions regarding double-taxation relief

and withholding tax rates, a positive effect of treaty formation remains. It is

therefore apparent that the potential deterrent aspects of tax treaty

implementation on investment are, at least in the European context, clearly

overcome by positive aspects.

43

1.5.2 Alternative estimation procedure

The score test proposed by Guimarães (2008) is implemented to check whether

the FENB model is controlling for both overdispersion and country-pair specific

effects. As Guimarães (2008) states, the test compares a saturated FENB

model that includes an individual intercept against the null hypothesis of a

common intercept.

The score test for each specification is provided at the bottom of Tables

1.8 and 1.9. Accordingly, the null hypothesis is rejected in all specifications

(except for regression 3 of Table 1.8), which indicates that FENB does not

remove the country-pair fixed effects. Note that although tests indicate a

rejection of the null hypothesis, one should interpret these statistics with

caution, as we have only 10 observations per country-pair, rather than the 20

observations required to adequately control for a type I error. Therefore, to

ascertain the robustness of such results and analysis, the estimates obtained

using an alternative estimation procedure is presented and discussed below.

Guimarães and Portugal (2010) propose an iterative estimation procedure

to fit high-dimensional fixed effects models without the need to introduce

explicitly the dummy variables. The provided extended version of the algorithm

to nonlinear models is used, which enables to fit the negative binomial model to

the sample of 1,332 country-pairs.

The dependent and explanatory variables are the same as earlier, with an

additional time variable - linear time trend - that ensures that the estimated tax

variables’ effects are not confounded by general time trends. This variable takes

the value 0 for the first year (2000), the value 1 for the second year, and so on.

The model is re-estimated using all specifications from Tables 1.8 and 1.9;

however, only those from Table 1.9 are displayed below (the re-estimation of

specifications from Table 1.8 are qualitatively similar to those obtained earlier).

The results are provided in Table 1.10.

44

Table 1.10

Effects of Tax Treaties on the Number of New Foreign Subsidiaries: An

Alternative Estimation Procedure

Note: Negative binomial model with country-pair fixed effects. The iterative estimation procedure is based on Guimarães and Portugal (2010). All regressions include a linear time trend variable. Standard errors are in parentheses. The marginal effects are evaluated at the sample means of the regressors. The bottom of the table indicates the number of country-pairs observations, respective groups, number of years, likelihood ratio test and pseudo-log-likelihood. ***, **, * indicate statistical significance at the 1, 5 and 10% level.

The estimated (�+,�- coefficients in the various specifications of Table

1.10 are positive and significant, with estimates ranging between 0.126 and

Variables (1) (2) (3) (4)

0.128*** 0.137*** 0.126***(0.046) (0.047) (0.046)

-0.522*** -0.461***(0.118) (0.118)

-1.962*** -1.962***(0.134) (0.135)

0.150(0.249)

3.967*** 3.971*** 4.130*** 4.136***(0.250) (0.250) (0.234) (0.234)

0.097*** 0.104*** 0.134*** 0.135***(0.021) (0.023) (0.020) (0.020)

-0.133 -0.137 -0.544*** -0.566***(0.174) (0.181) (0.175) (0.177)

-0.002 -0.002 -0.002 -0.002(0.002) (0.002) (0.002) (0.002)

0.236*** 0.235*** 0.202*** 0.189***(0.017) (0.018) (0.016) (0.017)

0.018*** 0.018*** 0.030*** 0.030***(0.004) (0.004) (0.003) (0.003)

Marginal effect

Treaty 1.088*** 1.172*** 1.014***ETR -4.245*** -3.704***hostCTR -16.742*** -16.759***WTR 1.284

Number of observations 8,070 8,070 8,070 8,070Groups 807 807 807 807Observations per group 10 10 10 10Pseudo log-lokelihood -14,037.9 -14,037.9 -14,055.0 -14,054.1Likelihood ratio test 4,254.5*** 4,254.6*** 4,220.3*** 4,222.1***p-value 0.000 0.000 0.000 0.000

Time_trend

Treaty

hostCTR

WTR

ETR

GDP

EU

INFL

ULC

PROD

45

0.137. Although the coefficients decrease when compared with the previous

FENB model, they still show that the implementation of a tax treaty increases

the number of new foreign subsidiaries by roughly 1.

The semi-elasticity of host countries’ STR is about -1.9, being significant at

a 1 per cent level. Although the coefficients of ℎ&��'() are lower, these

estimates are qualitatively similar to those obtained earlier.

The estimated semi-elasticity of the /() variable is -0.522, which is still

significant at a 1 per cent level. This suggests that a 1 percentage point

increase in the effective tax rate of a given host country leads to a decrease of

4.25 in the number of new foreign subsidiaries incorporated there, while a

previous estimation indicated there would be a -9.07 change.

Similarly to what was done previously, the last specification of Table 1.10

includes the (�+,�- and /() jointly, yielding estimating coefficients of 0.126

and -0.461 respectively. The marginal effects for (�+,�- and /() are 1.014 and

3.704 respectively, which is economically meaningful considering the sample

mean of the number of new subsidiaries. Additionally, it indicates that the

features of tax treaties, beyond the double-taxation relief and agreed

withholding tax rates, exert a positive effect on foreign investment. Overall, the

results and its implications obtained with this alternative estimation procedure

goes in the same direction as those obtained using the FENB model.

There might be some reverse causality concerns regarding tax treaties, as

it is more likely that they were primarily implemented between countries in

which the existent investment activity is already strong. Additionally, since the

level of investment also depends on the STR, it may occur that foreign

investment may reversely impact STR choice. In order to mitigate it, all

variables are lagged by one year. The estimates (available in Appendix D) are

qualitatively similar to those previously discussed.

Furthermore, in the following section it is implemented a matching

estimator approach that, along with the difference-in-difference methodology, is

recommended to guard against endogeneity.

46

1.6 Robustness checks

The impact of implementing a bilateral tax treaty may be estimated by

comparing the number of new foreign subsidiaries of country-pairs that

implement a new treaty with the corresponding counterfactual. As only a portion

of the sample is exposed to a new tax treaty (treatment), the set of country-pairs

for which there is no tax treaty may be taken as a control group.

Between 2000 and 2009 there were 253 country-pairs (out of 1332)

implementing tax treaties. Table 1.11 presents the number of new subsidiaries

incorporated by them before and after such a transition.

Table 1.11

Number of New Foreign Subsidiaries for Country-Pairs Implementing a Tax

Treaty between 2000 and 2009

Note: The table provides by year, the number of country-pairs that implement a tax treaty, as well as the respective number of new foreign subsidiaries incorporated from the third year and up to it after treaty formation. t denotes the year that a treaty becomes effective.

The number of subsidiaries in the year that treaties became effective grew

by 5.13 per cent from the previous year, but this increase becomes more

evident when considering the cumulative number for a two-year (three-year)

period after, and a two-year (three-year) period before the implementation of tax

treaties. The growth rate of the number of subsidiaries reaches 12 per cent

when two cumulative years are considered and 20 per cent for three years.

Although the variation is increasingly significant, it cannot be distinguished

whether this is due tax treaties implementation and/or due to other factors.

t-3 t-2 t-1 t t+1 t+2

2001 33 30 28 24 20

2002 21 11 16 25 21 17

2003 37 17 14 7 13 18 10

2004 37 13 25 21 37 26 26

2005 38 11 14 32 17 17 16

2006 25 20 26 11 20 25 24

2007 24 8 12 13 15 9 3

2008 15 3 5 5 2 1

2009 23 7 9 21 7

YearNew

treatiesTransition country-pairs before tax treaty Transition country-pairs after tax treaty

47

When one estimates the treatment effect (tax treaty), only one of the new

foreign subsidiaries is observed. Considering the observed number of new

foreign subsidiaries for a given country-pair i - as denoted by :�;<�=. (=, for

(= ∈ [0,1\ - signifies whether or not a given country-pair implements a tax treaty:

:�;<�= = ]:�;<�=(0)^G(= = 0:�;<�=(1)^G(= = 1 (2)

If country-pair i is exposed to treatment, only :�;<�=(1) may be observed.

To estimate the average treatment effect, Abadie and Inbems (2002) suggest

the estimation of the unobservable potential outcome - :�;<�=(0) - for each

observation in the sample using nearest neighbour matching across a set of

variables >=. In doing so, if the decision to take the treatment is random for

individuals with similar values of the covariates, the average outcome of some

similar country-pairs who were not treated can be used to estimate the

untreated outcome (Abadie and Imbens, 2002).

An estimation of the counterfactual treatment outcome may be carried out

using one or more matches. The variables to be matched and used to

determine the nearest neighbour are those used in the previous negative

binomial models (i.e. ℎ&��'(), 012, /4, 7896, 46', 2)51), as well as

'&:�^3;^�-, which takes the value 1 if home and host countries have a common

border.

Table 1.12 provides the average treatment effect of the treated, specifying

the different number of matches to be made per observation. There are control

and treatment observations from 2001 and 2009 (year 2000 is not presented, as

it would be necessary to have the treaties network from 1999); however, it is

imposed that each treatment observation has to be matched with a control unit

from the same year.

The estimated average effect of a tax treaty on treaty country-pairs was

calculated using a different number of matches. Table 1.12 provides, beyond

the estimated average effect of tax treaty, the variation of the number of new

foreign subsidiaries over the mean of new foreign subsidiaries incorporated by

country-pairs that do not implement a tax treaty and those that do so during the

period from 2001-2009. When treated observations are matched using three or

48

Table 1.12

Nearest Neighbour Matching Estimation for Average Tax Treaty Effect

Note: Estimates of the average tax treaty effect on the number of new subsidiaries by matching the number of new subsidiaries of treated observations with the control observations (non-treaty country-pairs). Matching was done using variables ranging from one to seven. All matching counterfactual estimates are from the same year as treatment observations. ***, **, * indicate statistical significance at the 1, 5 and 10% level.

more matches, results become significant at a standard level, with positive

estimated changes on the outcome variable ranging between 0.151 and 0.182.

These results support previous results suggesting that tax treaties play a

relevant and positive role in the location decision of multinationals.

1.7 Conclusions

This essay provides evidence of the effects of bilateral tax treaties on the

location decisions of European multinationals. For this it was analysed the

extent to which those agreements influence the number of new foreign

subsidiaries incorporated by European multinationals between 2000 and 2009.

This study contributes in several ways to the already existing literature.

Estimated average effect

% change

One-to-one matching 0.033 6.29Standard error 0.091Two nearest neighbour matching 0.116 22.13Standard error 0.086Three nearest neighbour matching 0.151* 28.80Standard error 0.082Four nearest neighbour matching 0.157* 29.95Standard error 0.082Five nearest neighbour matching 0.164** 31.28Standard error 0.081Six nearest neighbour matching 0.182** 34.71Standard error 0.080Seven nearest neighbour matching 0.179** 34.14Standard error 0.080

Number of observations 2,772

49

First, the sample encompasses a large number of foreign subsidiaries

located in a vast number of European countries; this significantly extends the

scope of existing literature and enables to analyse the dynamics of bilateral tax

treaties and other international taxation components in the European context.

Second, it is proposed and tested an effective tax rate, which captures the

corporate tax rates of both host and home countries, and tax treaty features

such as non-resident withholding tax rates and double-taxation relief methods.

Specific tax treaty features are mirrored in this tax measure, allowing for the

control of the confounding effects emerging from the use of a binary variable.

Using both the binary variable and the effective tax rate, findings indicate

that bilateral tax treaties have a significant impact on the number of foreign

subsidiaries incorporated. The results from the FENB model suggest that

(�+,�- and effective tax rate have semi-elasticities of 0.32 and -1.319

respectively. It was not expected a similar effect of both variables in absolute

value, as the former absorbs distinct effects and the latter also includes other

components of taxation such as the host country’s corporate tax rate. Although

the estimated semi-elasticities decrease, the alternative iterative estimation

procedure to fit high-dimensional fixed effects used in the robustness analysis

leads to qualitatively similar results.

When both the effective tax rate and tax treaty variables are analysed

simultaneously, results do not change significantly, generally suggesting

positive tax treaty effects. It was also found evidence confirming that the host

country´s corporate tax rate is an important and determining factor on the

location of foreign subsidiaries.

Overall, results indicate that taxation is a competitive factor for European

multinationals when deciding where to locate their foreign subsidiaries, as they

choose low-tax countries as hosts, particularly those with tax treaties in force.

51

Appendix A: Years in which double taxation agreemen ts became effective

Alb

ania

Aus

tria

Bel

gium

Bul

garia

Cro

atia

Cyp

rus

Cze

ch R

.

Den

mar

k

Est

onia

Fin

land

Fra

nce

Ger

man

y

Gre

ece

Hun

gary

Icel

and

Irel

and

Italy

Latv

ia

Lith

uani

a

Luxe

mb.

Mac

edon

ia

Mal

ta

Net

herla

.

Nor

way

Pol

and

Por

tuga

l

Rom

ania

Rus

sia

Ser

bia

Slo

vak

Rep

.

Slo

veni

a

Spa

in

Sw

eden

Sw

itzer

l.

Tur

key

Ukr

aine

UK

Albania - 2009 2005 2000 1998 1997 2006 2002 1996 2000 2009 1999 2001 2006 2000 1995 1995 1998 2006 2009 2000 2001 1997

1974 1985 2002 1991 1978 1959 2003 1963 1995 1955 1970 1976 1964 1986 2008 2006 1961 2008 1977 1969 1997 1974 1973 1978 2003 1978 1999 1968 1959 1975 1974 2000 1969

2008 2009 2002 2003 2006 2007

2005 1974 1992 1984 2000 1977 1971 2004 1979 1965 1966 1966 1984 2004 1973 1973 2004 2004 1972 1984 1976 1971 1992 1979 1972 1999 1990 1984 1977 1984 1972 1991 1980 1992 2000 1990

2005 2001 2006 2003 2005 2001 2001 2001 2003

Bulgaria 2000 1985 1992 1999 2002 2000 1990 1987 1988 1989 2001 1996 2002 1992 2005 2007 1994 2000 1988 1995 1990 1996 1997 1996 1996 2001 2002 2005 1992 1989 1994 1998 1998 1988

1998 2002 1984 1999 2000 1983 2005 1988 1977 1989 1999 1999 2004 1986 2002 2002 1997 2000 1984 1986 1997 1997 1998 2005 1997 2007 1982 2000 2001 2000 1983

2005 2006 2007 2002

1991 2000 1987 1981 1980 1983 1970 1967 1982 1962 1970 1994 1954 1992 1983 2000 1987 1981 1987 1988 1983 1973

2002

1997 1979 1977 2000 2000 1981 1983 1996 1996 1975 1984 1990 1995 2001 1997 1985 1996 1996 1993 1984 1998 1972 1980 1994 1998 1995 1998 1984 1994 1999 1982 1981 1996 2004 2000 1992

2008 2001 2006 2003 2006 2006 2004

1959 1971 1990 1983 1980 1983 1994 1997 1958 1997 1993 1980 1997 1994 1978 1994 1994 1979 1983 1999 1999 1997 1974 1974 1974 1998 1983 1983 1983 1974 1997 1975 1991 1997 1978

2009 2004 2001 2003 2003 2003

2003 2004 2009 2005 1996 1994 1994 1996 1994 2005 1996 1999 2001 1994 1994 2008 2004 1995 1994 1995 2005 2006 2007 2007 2005 1994 2005 2006 1997 1995

2002 2006

1963 1979 1987 1988 1996 1998 1994 1970 1981 1982 1982 1998 1990 1984 1994 1994 1980 1988 1977 1998 1998 1980 1972 1979 1987 1977 1988 1969 1998 1990 1989 1996 1968

2002 2003 2002 2001 2003 2001 2005

2006 1995 1965 1988 1975 1983 1975 1958 1996 1970 1957 1965 1982 1993 1966 1992 2002 1997 1957 1975 1979 1974 1981 1974 1973 1975 2000 1975 1975 1975 1998 1993 1983 1990 2000 1966

2006 2006 2005 2008

1955 1966 1989 1989 1970 1984 1997 1994 1981 1957 1964 1980 1968 1959 1993 1996 1995 1957 1989 1973 1956 1991 1972 1983 1972 1997 1989 1984 1989 1968 1995 1972 1990 1997 1960

2003 2007 2002 2005 2004 2007

2001 1972 1966 2001 1999 1967 1993 2009 1982 1965 1964 1985 2005 1984 2006 2006 1996 2009 1981 1992 1991 2003 1996 2008 1990 2004 2003 1963 1983 2005 2004 1951

2006

1996 1976 1984 1996 1999 1982 1995 1980 2005 1982 1980 1985 2007 1997 1980 2005 2005 1990 1988 1993 1988 1982 1996 2000 1996 1998 1988 1996 1988 1988 1983 1983 1993 1997 1979

2003 2003 2006

Iceland 2004 2001 1998 1996 1998 1993 1968 2009 2007 - 2005 2009 1996 2000 2002 2007 1999 1998 2000 2003 2009 2004 2004 2003 1998 1990 2009 1992

1964 1973 2002 2004 1962 1997 1994 1999 1990 1966 1959 2005 1997 2005 1967 1999 1999 1968 1965 1967 1996 1995 2001 1996 2000 2003 1995 1989 1974 1974

2002

1974 1990 1992 1986 1970 1985 1978 2001 1984 1992 1993 1984 1980 2009 1967 2009 2000 1978 1986 1976 1993 1985 1984 1983 1979 1999 1986 1985 1986 1969 1984 1979 1994 1995 19912004 2001

Cyprus

Czech R.

Denmark

-

Ireland

Italy

-

-

Estonia

Finland

France

Germany

Greece

Hungary

Austria

Belgium

Croatia

-

-

-

-

-

-

-

-

-

-

-

-

Home:

Host:

52

Alb

ania

Aus

tria

Bel

gium

Bul

garia

Cro

atia

Cyp

rus

Cze

ch R

.

Den

mar

k

Est

onia

Fin

land

Fra

nce

Ger

man

y

Gre

ece

Hun

gary

Icel

and

Irel

and

Italy

Latv

ia

Lith

uani

a

Luxe

mb.

Mac

edon

ia

Mal

ta

Net

herla

.

Nor

way

Pol

and

Por

tuga

l

Rom

ania

Rus

sia

Ser

bia

Slo

vak

Rep

.

Slo

veni

a

Spa

in

Sw

eden

Sw

itzer

l.

Tur

key

Ukr

aine

UK

2009 2008 2004 2005 2002 1996 1994 1994 1994 2002 1996 2006 2005 1996 1999 2009 1995 2007 2008 2001 1996 1994 1995 2004 2003 2007 2001 2003 2005 1994 2003 2004 1997 1997

2002

2006 2004 2007 2002 1996 1970 1994 1994 1997 1995 2006 2005 2000 1999 2000 1995 2007 2009 2005 2001 1994 1995 2004 2003 2006 2003 2003 2004 1994 2003 2001 1998 2002

2006

Luxemb. 2009 1961 1972 1994 1993 1979 2008 1980 1957 1957 1996 1990 2002 1968 1978 2007 2007 - 1996 1967 1986 1997 2001 1996 1998 1993 2003 1988 1999 1994 2006 1966

1999 2008 1984 2000 1997 1987 1984 1983 1988 1975 1989 1988 1986 2008 2009 2000 1986 2000 1988 2001 1998 1984 2000 2006 1999 2000 1997 1999 1983

2003 2001 2003 2005 2003 2001 2003 2008

2001 1977 1976 1988 2000 1994 1998 1999 2004 1977 1979 1973 2009 1993 2007 1976 2001 2005 1996 1976 1978 1995 2003 1997 2001 2004 1968 1997 1996

2002 2003 2007

2006 1969 1971 1995 1984 1972 1999 1995 1998 1974 1956 1981 1988 1999 1965 1993 1996 2001 1967 2000 1976 1991 1978 2001 2000 1999 1984 1972 1984 1973 1993 1949 1989 1997 1968

2003 2002 2004 2006

2000 1997 1992 1990 1986 1954 1980 1998 1994 1998 1981 1991 1992 1982 1998 1967 1985 1994 1994 1986 1978 1991 1976 1972 1982 1982 1980 1986 1964 1998 1990 1977 1997 1986

2006 2002 2003 2001 2001

1995 1974 1979 1996 1997 1992 1994 1974 1995 1980 1974 1972 1991 1996 2000 1996 1984 1995 1995 1997 1997 1995 1978 1976 1999 1996 1994 1999 1996 1999 1983 1974 1992 1997 1995 1975

2006 2005 2003 2005 2004 2006 2007

1973 1972 1997 1998 1974 2005 1972 1973 1983 2003 2000 2003 1995 1983 2004 2004 2001 2003 2001 1972 1999 2000 2003 2005 2005 1996 2000 1976 2007 2003 1970

2003

1995 1978 1999 1996 1997 1983 1995 1974 2006 1979 1975 1972 1996 1996 2009 2001 1979 2003 2003 1996 1988 1997 2000 1982 1996 2000 1996 1998 1996 1988 1980 1978 1994 1989 1998 1976

2007 2001 2004 2003 2004

1998 1979 1990 1996 1998 2000 1998 1998 1987 2000 1997 2008 1998 2004 1996 1999 2006 1998 2001 1999 1982 1994 2003 1996 1998 1998 1998 1987 1996 1998 2000 2000 1998

2003 2001 2003 2003 2001

2006 1984 2001 2005 1987 1984 1983 1988 1975 1989 1988 1986 2007 1998 1984 1986 1999 1998 1998 1984 2004 1982 2007 2008 2002 1983

2006 2003 2002

1979 1977 2002 1997 1981 1994 1983 2007 1977 1975 1984 1990 1996 2004 2000 1985 2001 2003 1993 1984 2001 1972 1980 1996 2005 1996 1998 1984 1984 1982 1981 1998 2000 1997 1992

2001 2004 2001 2002 2005

1999 1984 2005 2006 1987 1999 1983 2007 2005 1975 1989 2004 1988 2003 1986 2003 2003 2003 2000 2004 1984 1986 1999 2005 1988 1998 2004 1984 2003 1982 1998 2004 2008 1983

2003 2003 2008 2007 2006 2006 2004 2005 2009

1968 1972 1992 2007 1982 1974 2005 1969 1998 1968 2003 1988 2003 1995 1969 2005 2004 1988 2006 2007 1973 1964 1983 1996 1980 1987 1982 2003 1975 1967 2004 2008 1976

2003 2001 2001

2000 2000 1991 1989 1982 1988 1981 1998 1994 1998 1993 1995 1963 1983 1998 1989 1984 1994 1994 1999 1999 1997 1993 1998 1974 2000 1978 1996 1982 1981 1982 1975 1966 1991 1997 1985

2006

2001 1975 1980 1994 2000 1996 1975 2005 1990 1967 1972 1983 1983 1990 1974 1979 2003 2003 1994 2000 1949 1990 1992 1976 1994 1998 2007 1998 1998 1967 1966 1989 19782003

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

Switzerl.

Sweden

Spain

Serbia

Slovak R.

Slovenia

Malta

Netherla.

Norway

Poland

Portugal

Romania

Russia

Latvia

Lithuania

Macedonia

Home:

Host:

53

Note: The table displays by country-pair the year in which bilateral agreements became effective. The table is not symmetric as the year of first application of a tax treaty may differ between treaty partners. During the period 2000-2009, several country-pairs has replaced tax treaties. In these cases, it is reported the years of first application of both treaties (old and new). It was taken into account the provisions of both old and new tax treaties (e.g. non-resident withholding tax rates). Tax treaties signed by former countries (e.g. Yugoslavia, Czechoslovakia) were considered with respect to the new countries when treaty partners are honoring these treaties. Source: IBFD, Ernst & Young’s Worldwide Corporate Tax Guide and websites of various fiscal authorities.

Alb

ania

Aus

tria

Bel

gium

Bul

garia

Cro

atia

Cyp

rus

Cze

ch R

.

Den

mar

k

Est

onia

Fin

land

Fra

nce

Ger

man

y

Gre

ece

Hun

gary

Icel

and

Irel

and

Italy

Latv

ia

Lith

uani

a

Luxe

mb.

Mac

edon

ia

Mal

ta

Net

herla

.

Nor

way

Pol

and

Por

tuga

l

Rom

ania

Rus

sia

Ser

bia

Slo

vak

Rep

.

Slo

veni

a

Spa

in

Sw

eden

Sw

itzer

l.

Tur

key

Ukr

aine

UK

Turkey 1997 1974 1992 1998 2001 2004 1991 2006 1989 1990 1990 2005 1993 1994 2004 2001 2006 1997 1989 1977 1997 2007 1989 2000 2008 2000 2004 2004 1991 - 1999 1989

2000 2000 1998 2000 1983 2000 1997 1997 1996 2000 1997 2004 1997 2009 1995 1997 1998 1999 1997 1997 1995 2003 1998 2000 2002 1997 2008 1987 1997 1989 1999 1994

2003

1969 1990 1988 1983 1973 1992 1978 1995 1968 1966 1960 1951 1979 1992 1974 1991 1997 2002 1966 1983 1996 1968 1986 1975 1970 1976 1998 1983 1992 1983 1976 1985 1978 1989 19942008 2001 2001 2009

Ukraine

UK -

-

Home:

Host:

Home:

Host:

55

Appendix B: Foreign income tax system by country

Note: This table provides information by home country on the treatment of foreign income (dividends) from treaty and non-treaty countries.

Home country Treaty countries Non-treaty countries

Albania Exemption No reliefAustria Exemption ExemptionBelgium Exemption (up to 95%) Exemption (up to 95%)Bulgaria Indirect IndirectCroatia Exemption ExemptionCyprus Exemption ExemptionCzech Republic Indirect DeductionDenmark Exemption Exemption

EstoniaIndirect (until 2005) Exemption (2006-09)

Indirect (until 2005) Exemption (2006-09)

Finland Exemption DirectFrance Exemption (up to 95%) Exemption (up to 95%)Germany Exemption (up to 95%) Exemption (up to 95%)Greece Indirect IndirectHungary Exemption ExemptionIceland Exemption ExemptionIreland Indirect IndirectItaly Exemption (up to 95%) Exemption (up to 95%)Latvia Exemption ExemptionLithuania Exemption ExemptionLuxembourg Exemption ExemptionMacedonia Direct DirectMalta Indirect IndirectNetherlands Exemption ExemptionNorway Indirect IndirectPoland Indirect DirectPortugal Direct DirectRomania Indirect IndirectRussia Direct No reliefSerbia Indirect Indirect

Slovak RepublicIndirect (until 2003) Exemption (2004/09)

No relief (until 2003) Exemption (2004/09)

Slovenia Exemption ExemptionSpain Exemption IndirectSweden Exemption ExemptionSwitzerland Exemption ExemptionTurkey Indirect DirectUkraine Direct No relief

UK Indirect Indirect

57

Appendix C: Effective tax rates by country-pair (20 00)

Alb

ania

Aus

tria

Bel

gium

Bul

garia

Cro

atia

Cyp

rus

Cze

ch R

.

Den

mar

k

Est

onia

Fin

land

Fra

nce

Ger

man

y

Gre

ece

Hun

gary

Icel

and

Irel

and

Italy

Latv

ia

Lith

uani

a

Luxe

mb.

Mac

edon

ia

Mal

ta

Net

herla

.

Nor

way

Pol

and

Por

tuga

l

Rom

ania

Rus

sia

Ser

bia

Slo

vak

Rep

.

Slo

veni

a

Spa

in

Sw

eden

Sw

itzer

l.

Tur

key

Ukr

aine

UK

Albania - 36,3 38,3 37 32,5 36,3 31 36,3 36,3 46,8 38,1 38,4 36,3 28,8 36,3 36,3 34,4 36,3 36,3 36,3 36,3 36,3 36,3 28,8 30 51,4 38 51,3 36,3 65,3 36,3 36,3 28,8 36,3 33 66,3 36,3

Austria 75,50 - 36 37 50,5 40,6 40,6 34 50,5 53,1 35,9 36,2 35 40,6 50,5 34 35,9 50,5 50,5 34 50,5 43,9 34 37,3 53,8 57,2 43,9 85,5 50,5 40,6 37,3 34 34 34 50,5 53,8 34

Belgium 80,2 40,2 - 46,2 46,2 46,2 49,2 40,2 55,2 40,2 42,1 42,4 40,2 46,2 55,2 40,2 42,1 55,2 55,2 40,2 49,2 49,2 40,2 43,2 46,2 61,2 46,2 61,1 46,2 40,2 46,2 40,2 40,2 46,2 49,2 58,1 40,2

Bulgaria 40,2 37 45,3 - 40,2 46,5 43,3 40,2 46,5 43,3 42 48,6 46,5 43,3 46,5 46,5 45,2 46,5 46,5 40,2 46,5 37 40,2 46,5 43,3 59,2 43,3 59,1 46,5 75,5 46,5 40,2 43,3 40,2 43,3 55,9 43,3

Croatia 41,5 44,8 43,5 38,3 - 44,8 38,3 38,3 44,8 38,3 40,1 46,9 38,3 38,3 44,8 44,8 43,4 44,8 44,8 44,8 44,8 38,3 38,3 44,8 38,3 57,9 38,3 57,8 44,8 38,3 44,8 44,8 38,3 38,3 56,5 54,5 38,3

Cyprus 50 25 27 37 25 - 31 25 26 46,8 26,9 27,2 35 25 25 25 26,9 25 25 25 36,3 35 25 28 30 51,4 38 51,3 25 29 25 35 25 25 49,8 47,5 30

Czech R. 34,5 37,9 43,4 37,9 34,5 37,9 - 41,4 34,5 34,5 39,8 36,6 41,4 34,5 41,4 34,5 43,2 34,5 34,5 34,5 41,4 35 31 34,5 31 55,3 38 55,2 34,5 34,5 34,5 34,5 31 34,5 53,8 51,7 34,5

Denmark 74 32 34 37 35,4 38,8 42,2 - 35,4 32 33,9 34,2 35 35,4 32 32 33,9 35,4 35,4 32 42,2 35 32 32 35,4 55,9 38,8 55,8 35,4 42,2 35,4 32 32 32 42,2 52,4 32

Estonia 51 26 28 37 26 26 31 26 - 26 27,9 28,2 35 26 26 26 27,9 26 26 26 37,1 35 26 28 30 52 38 61 26 55 26 35 26 26 50,4 48,2 30

Finland 74,6 29 31 37 32,6 49,6 32,6 29 29 - 30,9 31,2 35 32,6 29 29 30,9 29 29 29 39,7 35 29 29 30 54 38 53,9 49,6 32,6 32,6 29 29 29 39,7 50,3 30

France 78,3 37,8 39,8 40,9 40,9 44 44 37,8 40,9 37,8 - 39,9 37,8 37,8 40,9 37,8 39,6 53,3 40,9 37,8 47,1 40,9 37,8 37,8 40,9 59,7 44 59,5 53,3 44 40,9 37,8 37,8 37,8 47,1 56,4 37,8

Germany 82,5 43,3 45,3 51,8 51,8 49 46,1 43,3 46,1 43,3 45,2 - 43,3 46,1 46,1 43,3 45,1 46,1 46,1 43,3 51,8 57,5 43,3 46,1 46,1 63,2 49 63,1 51,8 46,1 51,8 43,3 43,3 46,1 51,8 60,3 43,3

Greece 60 35 37 37 35 35 35 35 35 35 36,9 37,2 - 35 35 35 36,9 35 35 35 44,8 35 35 35 35 57,9 38 70 35 35 35 35 35 35 56,5 65 35

Hungary 22,1 26,2 28,2 37 22,1 22,1 31 22,1 34,4 22,1 24 24,3 35 - 34,4 24 28,1 34,4 34,4 22,1 30,3 35 22,1 28 30 46,9 38 46,7 26,2 29 26,2 22,1 22,1 26,2 33 42,6 30

Iceland 65,5 40,5 42,5 40,5 40,5 40,5 58,9 30 33,5 30 35,4 35,7 40,5 40,5 - 40,5 42,4 33,5 33,5 40,5 40,5 40,5 30 30 33,5 54,6 40,5 75,5 40,5 69,5 40,5 40,5 30 33,5 53,1 70,5 33,5

Ireland 65,7 24 26 40,7 40,7 24 31 24 26 24 25,9 26,2 35 24 40,7 - 25,9 24 24 24 40,7 40,7 24 28 30 50,8 40,7 50,6 40,7 29 40,7 24 24 24 49,1 70,7 30

Italy 43,3 37 39 43,3 43,3 46,5 46,5 37 54 37 38,9 39,2 37 43,3 54 37 - 54 40,2 37 46,5 46,5 37 46,5 43,3 59,2 43,3 59,1 43,3 46,5 43,3 37 37 46,5 46,5 55,9 37

Latvia 57,5 32,5 34,5 37 32,5 32,5 31 28,8 26 28,8 34,4 30,9 35 32,5 28,8 28,8 34,4 - 25 32,5 36,3 35 28,8 28,8 30 51,4 38 67,5 32,5 61,5 32,5 35 28,8 32,5 49,8 47,5 30

Lithuania 71 46 48,1 46 46 46 31 27,8 26 27,8 29,7 30 46 46 27,8 27,8 29,7 24 - 46 46 46 46 28 30 50,8 46 81 46 75 46 46 27,8 46 49,1 46,8 46

Luxemb. 78,1 37,5 39,5 40,6 53,1 53,1 40,6 37,5 53,1 37,5 39,4 39,7 37,5 40,6 53,1 37,5 39,4 53,1 53,1 - 53,1 40,6 37,5 40,6 40,6 59,5 40,6 59,4 53,1 40,6 53,1 37,5 37,5 40,6 58,1 83,1 37,5

Macedonia 23,5 NA 25,5 37 19,3 23,5 31 19,3 NA 19,3 21,1 29,9 NA 23,5 NA NA 25,4 NA NA NA - NA 27,8 28 30 NA 38 NA 20 29 19,3 NA 15 19,3 33 40,5 30

Malta 60 35 37 37 35 35 35 35 35 35 36,9 37,2 35 35 35 35 36,9 35 35 35 44,8 - 35 35 35 57,9 38 70 35 64 35 35 35 35 56,5 65 35

Netherla. 76,3 35 37 38,3 38,3 51,3 35 35 38,3 35 36,9 37,2 35 38,3 35 35 36,9 38,3 51,3 35 44,8 38,3 - 35 35 57,9 38 57,8 38,3 35 38,3 35 35 35 38,3 54,5 35

Norway 31,6 31,6 33,6 38,8 38,8 28 31,6 28 31,6 28 29,9 33,8 42,4 35,2 28 28 40,7 31,6 31,6 31,6 46 38,8 28 - 31,6 53,3 38 53,2 46 31,6 38,8 35,2 28 31,6 42,4 49,6 31,6

Poland 33,5 37 39 37 33,5 37 33,5 33,5 33,5 33,5 35,4 35,7 44 37 33,5 30 38,9 33,5 33,5 33,5 40,5 35 30 33,5 - 54,6 38 54,5 33,5 33,5 33,5 33,5 33,5 33,5 37 51 33,5

Portugal 76,4 35,2 37,2 41,7 51,4 51,4 41,7 35,2 51,4 35,2 37,1 37,4 35,2 41,7 51,4 35,2 37,1 51,4 51,4 35,2 51,4 51,4 35,2 41,7 41,7 - 41,7 86,4 51,4 80,4 51,4 35,2 35,2 41,7 56,6 81,4 35,2

Romania 44,2 47,3 43,1 44,2 41,1 44,2 44,2 44,2 44,2 44,2 46,1 46,4 44,2 41,1 44,2 44,2 46,1 44,2 44,2 41,1 47,3 41,1 38 44,2 41,1 59,8 - 59,7 44,2 44,2 41,1 44,2 44,2 44,2 47,3 56,6 44,2

Russia 41,5 35 46,8 44,8 38,3 38,3 41,5 41,5 44,8 35 40,1 40,4 44,8 41,5 44,8 41,5 40,1 44,8 44,8 41,5 44,8 44,8 38,3 48 41,5 57,9 44,8 - 38,3 41,5 41,5 46,7 38,3 38,3 41,5 54,5 41,5

Serbia 61 36 30 37 36 28 31 24 36 24 25,9 34,2 36 28 36 36 29,9 36 36 36 32 36 24 32 30 48,2 38 48 - 29 36 36 24 36 46,4 66 30

Slovak R. 64,7 36,1 41,7 39,7 32,6 36,1 32,6 39,7 39,7 32,6 38 34,7 39,7 32,6 39,7 29 41,5 39,7 39,7 32,6 39,7 39,7 29 32,6 32,6 54 38 53,9 32,6 - 32,6 32,6 29 32,6 33 50,3 32,6

Slovenia 61,3 28,8 30,8 37 36,3 32,5 31 28,8 36,3 46,8 30,6 38,4 36,3 32,5 36,3 36,3 34,4 36,3 36,3 36,3 36,3 36,3 28,8 36,3 30 51,4 38 51,3 36,3 29 - 36,3 28,8 28,8 49,8 66,3 30

Spain 71,7 35 37 38,3 46,7 46,7 38,3 35 46,7 35 36,9 37,2 35 38,3 46,7 35 36,9 46,7 46,7 35 46,7 46,7 35 41,5 38,3 57,9 41,5 57,8 46,7 38,3 46,7 - 35 41,5 56,5 76,7 35

Sweden 28 28 30 37 28 28 31 28 28 28 29,9 30,2 35 28 28 28 29,9 28 28 28 38,8 35 28 28 30 53,3 38 53,2 28 29 28 28 - 28 33 49,6 30

Switzerl. 76,2 24,9 34,4 37 28,7 51,2 31 24,9 51,2 28,7 26,8 30,8 35 32,4 28,7 32,4 38 51,2 51,2 24,9 36,2 51,2 24,9 28,7 30 51,3 38 51,2 51,2 29 28,7 32,4 24,9 - 51,2 51,2 30

Turkey 36,4 49,8 45,1 39,7 43,1 43,1 60,7 43,1 43,1 43,1 44,9 45,2 43,1 39,7 43,1 43,1 44,9 43,1 43,1 43,1 43,1 43,1 39,7 49,8 39,7 56,6 43,1 56,5 43,1 36,4 43,1 43,1 43,1 43,1 - 53,1 43,1

Ukraine 65,5 33,5 35,5 37 33,5 30 33,5 33,5 33,5 33,5 35,4 35,7 40,5 33,5 40,5 40,5 42,4 33,5 33,5 40,5 40,5 40,5 33,5 33,5 33,5 54,6 38 54,5 40,5 37 40,5 40,5 33,5 40,5 37 - 33,5

UK 55 30 32 37 30 30 31 30 30 30 31,9 32,2 35 30 30 30 31,9 30 30 30 40,5 35 30 30 30 54,6 38 54,5 30 30 30 30 30 30 33 51 -

Home:

Host:

58


Alb

ania

Aus

tria

Bel

gium

Bul

garia

Cro

atia

Cyp

rus

Cze

ch R

.

Den

mar

k

Est

onia

Fin

land

Fra

nce

Ger

man

y

Gre

ece

Hun

gary

Icel

and

Irel

and

Italy

Latv

ia

Lith

uani

a

Luxe

mb.

Mac

edon

ia

Mal

ta

Net

herla

.

Nor

way

Pol

and

Por

tuga

l

Rom

ania

Rus

sia

Ser

bia

Slo

vak

Rep

.

Slo

veni

a

Spa

in

Sw

eden

Sw

itzer

l.

Tur

key

Ukr

aine

UK

Albania - 36,3 38,3 32,5 32,5 36,3 31 36,3 36,3 46,8 38,1 38,2 40 28,8 36,3 36,3 34,3 36,3 36,3 36,3 36,3 35 36,3 28,8 28,8 51,4 32,5 51,3 36,3 65,3 36,3 36,3 28,8 28,8 33 66,3 36,3

Austria 75,5 - 36 34 50,5 40,6 40,6 34 50,5 53,1 35,8 35,9 40 40,6 50,5 34 35,8 50,5 50,5 34 50,5 43,9 34 37,3 52,5 57,2 43,9 85,5 50,5 40,6 37,3 34 34 34 50,5 53,8 34

Belgium 80,2 40,2 - 46,2 46,2 46,2 43,2 40,2 55,2 40,2 42 42,1 40,2 46,2 55,2 40,2 42 55,2 55,2 40,2 49,2 49,2 40,2 43,2 46,2 61,2 46,2 61,1 46,2 43,2 43,2 40,2 40,2 46,2 49,2 58,1 40,2

Bulgaria 35,9 32,5 41,3 - 35,9 42,6 39,3 35,9 42,6 39,3 37,7 44,6 40 39,3 42,6 42,6 41,1 42,6 42,6 35,9 42,6 35 35,9 42,6 39,3 56,3 39,3 56,1 35,9 71,6 42,6 35,9 39,3 35,9 39,3 52,8 39,3

Croatia 41,5 44,8 43,5 38,3 - 44,8 38,3 38,3 44,8 38,3 40,1 46,7 40 38,3 44,8 44,8 43,3 44,8 44,8 44,8 44,8 38,3 38,3 44,8 38,3 57,9 38,3 57,8 44,8 38,3 44,8 44,8 38,3 38,3 41,5 54,5 38,3

Cyprus 50 25 27 32,5 25 - 31 25 26 46,8 26,8 26,9 40 25 25 25 26,8 25 25 25 36,3 35 25 28 28 51,4 25 51,3 25 29 25 35 25 25 49,8 47,5 30

Czech R. 34,5 37,9 36,5 37,9 34,5 37,9 - 41,4 34,5 34,5 39,7 36,4 41,4 34,5 34,5 34,5 43,2 34,5 34,5 34,5 41,4 35 31 34,5 31 55,3 37,9 55,2 34,5 34,5 34,5 34,5 31 34,5 53,8 51,7 34,5

Denmark 72,5 30 32 33,5 33,5 37 40,5 - 33,5 30 31,8 31,9 40 33,5 30 30 31,8 33,5 33,5 30 40,5 35 30 30 33,5 54,6 37 54,5 33,5 40,5 33,5 30 30 30 40,5 51 30

Estonia 51 26 28 32,5 26 26 31 26 - 26 27,8 27,9 40 26 26 26 27,8 26 26 26 37,1 35 26 28 28 52 26 61 26 55 26 35 26 26 50,4 48,2 30

Finland 74,6 29 31 36,1 32,6 49,6 32,6 29 29 - 30,8 30,9 40 32,6 29 29 30,8 29 29 29 39,7 35 29 29 29 54 32,6 53,9 49,6 32,6 32,6 29 29 29 39,7 50,3 30

France 77,3 36,5 38,5 39,6 39,6 42,8 42,8 36,5 39,6 36,5 - 38,4 40 36,5 39,6 36,5 38,3 52,3 39,6 36,5 46 39,6 36,5 36,5 39,6 58,8 42,8 58,7 52,3 42,8 39,6 36,5 36,5 36,5 46 55,5 36,5

Germany 79,2 38,9 40,9 48,1 48,1 45 42 38,9 42 38,9 40,7 - 40 42 42 38,9 40,7 42 42 38,9 48,1 54,2 38,9 42 42 60,4 45 60,3 48,1 42 48,1 38,9 38,9 42 48,1 57,2 38,9

Greece 40 40 42 40 40 40 40 40 40 40 41,8 41,9 - 40 40 40 41,8 40 40 40 49 40 40 40 40 61,1 40 75 40 40 40 40 40 40 59,8 70 40

Hungary 22,1 26,2 28,2 32,5 22,1 22,1 31 22,1 34,4 22,1 23,9 24 40 - 34,4 22,1 28 34,4 34,4 22,1 30,3 35 22,1 28 28 46,9 25 46,7 26,2 29 26,2 22,1 22,1 26,2 33 42,6 30

Iceland 65,5 40,5 42,5 40,5 40,5 40,5 33,5 30 33,5 30 35,3 35,4 40,5 40,5 - 40,5 42,3 33,5 33,5 40,5 40,5 40,5 30 30 33,5 54,6 40,5 75,5 40,5 69,5 40,5 40,5 30 33,5 53,1 70,5 33,5

Ireland 61 20 22 36 36 20 31 20 26 20 21,8 21,9 40 20 36 - 21,8 20 20 20 36 36 20 28 28 48,2 25 48 36 29 36 20 20 20 46,4 66 30

Italy 42,4 36 38 42,4 42,4 45,6 45,6 36 39,2 36 37,8 37,9 40 42,4 53,3 36 - 53,3 39,2 36 45,6 45,6 36 45,6 42,4 58,5 42,4 58,4 42,4 45,6 42,4 36 36 45,6 45,6 55,2 36

Latvia 57,5 32,5 34,5 32,5 32,5 32,5 31 28,8 26 28,8 34,3 30,7 40 32,5 28,8 28,8 34,3 - 25 32,5 36,3 35 28,8 28,8 28,8 51,4 32,5 67,5 32,5 32,5 32,5 35 28,8 32,5 49,8 47,5 30

Lithuania 71 46 48,1 46 46 46 31 27,8 26 27,8 29,6 29,7 46 46 27,8 27,8 29,6 24 - 46 46 46 27,8 28 28 50,8 46 81 46 75 46 46 27,8 46 33 46,8 46

Luxemb. 78,1 37,5 39,5 40,6 53,1 53,1 40,6 37,5 53,1 37,5 39,3 39,4 40 40,6 53,1 37,5 39,3 53,1 53,1 - 53,1 40,6 37,5 40,6 40,6 59,5 40,6 59,4 53,1 40,6 53,1 37,5 37,5 40,6 58,1 83,1 37,5

Macedonia 23,5 NA 25,5 32,5 19,3 23,5 31 19,3 NA 19,3 21,1 29,7 NA 23,5 NA NA 21,1 NA NA NA - NA 27,8 28 28 NA 25 44,8 20 29 19,3 NA 15 19,3 33 40,5 30

Malta 35 35 37 35 35 35 35 35 35 35 36,8 36,9 40 35 35 35 36,8 35 35 35 44,8 - 35 35 35 57,9 35 70 35 35 35 35 35 35 56,5 65 35

Netherla. 76,3 35 37 38,3 38,3 51,3 35 35 38,3 35 36,8 36,9 40 38,3 35 35 36,8 38,3 38,3 35 44,8 38,3 - 35 35 57,9 35 57,8 38,3 35 38,3 35 35 35 38,3 54,5 35

Norway 31,6 31,6 33,6 38,8 38,8 28 31,6 28 31,6 28 29,8 33,5 42,4 35,2 28 28 40,6 31,6 31,6 31,6 46 38,8 28 - 31,6 53,3 35,2 53,2 46 31,6 38,8 35,2 28 31,6 42,4 49,6 31,6

Poland 31,6 35,2 37,2 35,2 31,6 35,2 31,6 31,6 31,6 31,6 33,4 33,5 42,4 35,2 31,6 28 37 31,6 31,6 31,6 38,8 35 28 31,6 - 53,3 31,6 53,2 31,6 31,6 31,6 31,6 31,6 31,6 35,2 49,6 31,6

Portugal 76,4 35,2 37,2 41,7 51,4 51,4 41,7 35,2 51,4 35,2 37 37,1 40 41,7 51,4 35,2 37 51,4 51,4 35,2 51,4 51,4 35,2 41,7 41,7 - 41,7 86,4 51,4 80,4 51,4 35,2 35,2 41,7 56,6 81,4 35,2

Romania 32,5 36,3 30,8 32,5 28,8 32,5 32,5 32,5 32,5 28,8 34,3 34,4 40 28,8 32,5 27,3 34,3 32,5 32,5 28,8 36,3 35 25 32,5 28,8 51,4 - 51,3 32,5 32,5 28,8 32,5 32,5 32,5 36,3 47,5 32,5

Russia 41,5 35 43,5 44,8 38,3 38,3 41,5 41,5 44,8 35 40,1 40,2 44,8 41,5 44,8 41,5 40,1 44,8 44,8 41,5 44,8 44,8 38,3 48 41,5 57,9 44,8 - 38,3 41,5 41,5 38,3 38,3 38,3 41,5 54,5 41,5

Serbia 61 36 30 32,5 36 28 31 24 36 24 25,8 33,9 40 28 36 36 29,8 36 36 36 32 36 24 32 28 48,2 28 48 - 29 36 36 24 36 46,4 66 30

Slovak R. 64,7 36,1 34,6 39,7 32,6 36,1 32,6 39,7 39,7 32,6 37,9 34,5 40 32,6 39,7 29 41,5 36,1 39,7 32,6 39,7 35 29 32,6 32,6 54 36,1 53,9 32,6 - 32,6 32,6 29 32,6 33 50,3 32,6

Slovenia 61,3 28,8 30,8 36,3 36,3 32,5 31 28,8 36,3 46,8 30,6 38,2 40 32,5 36,3 36,3 34,3 36,3 36,3 36,3 36,3 36,3 28,8 36,3 28,8 51,4 28,8 51,3 36,3 29 - 36,3 28,8 28,8 49,8 66,3 30

Spain 71,7 35 37 38,3 46,7 46,7 38,3 35 46,7 35 36,8 36,9 40 38,3 46,7 35 36,8 46,7 46,7 35 46,7 46,7 35 41,5 38,3 57,9 41,5 57,8 46,7 38,3 46,7 - 35 41,5 56,5 76,7 35

Sweden 28 28 30 32,5 28 28 31 28 28 28 29,8 29,9 40 28 28 28 29,8 28 28 28 38,8 35 28 28 28 53,3 28 53,2 28 29 28 28 - 28 33 49,6 30

Switzerl. 28,5 24,7 34,2 32,5 28,5 51,1 31 24,7 51,1 28,5 26,5 30,4 40 32,2 28,5 32,2 37,8 51,1 51,1 24,7 36 51,1 24,7 28,5 28,5 51,2 32,2 51,1 51,1 29 28,5 32,2 24,7 - 51,1 51,1 30

Turkey 36,4 49,8 45,1 39,7 39,7 43,1 60,7 43,1 43,1 43,1 44,9 45 43,1 39,7 43,1 43,1 44,9 43,1 39,7 43,1 43,1 43,1 39,7 49,8 39,7 56,6 43,1 56,5 43,1 36,4 43,1 43,1 43,1 43,1 - 53,1 43,1

Ukraine 65,5 33,5 35,5 33,5 33,5 30 33,5 33,5 33,5 33,5 35,3 35,4 40,5 33,5 40,5 40,5 42,3 33,5 33,5 40,5 40,5 40,5 33,5 33,5 33,5 54,6 37 54,5 40,5 37 40,5 40,5 33,5 40,5 37 - 33,5

UK 55 30 32 32,5 30 30 31 30 30 30 31,8 31,9 40 30 30 30 31,8 30 30 30 40,5 35 30 30 30 54,6 30 54,5 30 30 30 30 30 30 33 51 -

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Albania - 36,3 38,3 28,8 32,5 36,3 31 36,3 36,3 46,8 38 38,2 35 28,8 36,3 36,3 34,3 36,3 36,3 36,3 36,3 35 36,3 28,8 28,8 49,8 32,5 43 36,3 61,3 36,3 36,3 28,8 28,8 33 66,3 36,3

Austria 75,5 - 36 34 34 40,6 40,6 34 50,5 34 35,8 35,9 35 40,6 50,5 34 35,8 50,5 50,5 34 50,5 43,9 34 37,3 52,5 55,8 43,9 74,5 50,5 40,6 37,3 34 34 34 50,5 53,8 34

Belgium 80,2 40,2 - 46,2 46,2 46,2 43,2 40,2 55,2 40,2 42 42,1 40,2 46,2 55,2 40,2 42 55,2 55,2 40,2 49,2 49,2 40,2 43,2 46,2 59,9 46,2 54,6 46,2 43,2 43,2 40,2 40,2 46,2 49,2 58,1 40,2

Bulgaria 31,6 28 37,2 - 31,6 31,6 35,2 31,6 38,8 35,2 33,4 40,7 35,2 35,2 38,8 31,6 37 38,8 38,8 31,6 38,8 35 31,6 38,8 35,2 51,8 35,2 45,3 31,6 35,2 38,8 31,6 35,2 31,6 35,2 49,6 35,2

Croatia 28 20 30 28 - 32 31 24 32 24 25,8 33,9 35 24 32 32 29,8 24 24 32 32 35 20 32 28 46,4 25 39,2 32 25 32 35 24 24 33 44 30

Cyprus 50 25 27 28 25 - 31 25 26 46,8 26,8 26,9 35 25 25 25 26,8 25 25 25 36,3 35 25 28 28 49,8 25 43 25 25 25 35 25 25 49,8 47,5 30

Czech R. 34,5 37,9 36,5 37,9 34,5 37,9 - 41,4 34,5 34,5 39,7 36,4 41,4 34,5 34,5 34,5 43,2 34,5 34,5 34,5 41,4 35 31 34,5 31 53,8 37,9 47,6 34,5 34,5 34,5 34,5 31 34,5 53,8 51,7 34,5

Denmark 74,6 30 32 33,5 33,5 37 40,5 - 33,5 30 31,8 31,9 35 33,5 30 30 31,8 33,5 33,5 30 40,5 35 30 30 33,5 53,1 37 46,8 33,5 40,5 33,5 30 30 30 40,5 51 30

Estonia 51 26 28 28 26 26 31 26 - 26 27,8 27,9 35 26 26 26 27,8 26 26 26 37,1 35 26 28 28 50,4 26 50 26 51 26 35 26 26 50,4 48,2 30

Finland 74,6 29 31 36,1 32,6 49,6 32,6 29 29 - 30,8 30,9 35 32,6 29 29 30,8 29 29 29 39,7 35 29 29 29 52,4 32,6 46 49,6 32,6 32,6 29 29 29 39,7 50,3 30

France 76,6 35,4 37,4 38,7 38,7 41,9 41,9 35,4 38,7 35,4 - 37,4 35,4 35,4 38,7 35,4 37,2 38,7 38,7 35,4 45,1 38,7 35,4 35,4 38,7 56,7 41,9 50,9 51,6 41,9 38,7 35,4 35,4 35,4 45,1 54,8 35,4

Germany 79,2 38,9 40,9 48,1 48,1 45 42 38,9 42 38,9 40,7 - 38,9 42 42 38,9 40,7 42 42 38,9 48,1 42 38,9 38,9 42 59,1 45 53,6 48,1 42 48,1 38,9 38,9 42 48,1 57,2 38,9

Greece 35 35 37 35 35 35 35 35 35 35 36,8 36,9 - 35 35 35 36,8 35 35 35 44,8 35 35 35 35 56,5 35 59 35 35 35 35 35 35 56,5 65 35

Hungary 22,1 26,2 28,2 28 22,1 22,1 31 22,1 34,4 22,1 23,9 24 35 - 34,4 22,1 28 34,4 34,4 22,1 30,3 35 22,1 28 28 45,1 25 37,7 26,2 25 26,2 22,1 22,1 26,2 33 42,6 30

Iceland 55,3 30,3 32,3 30,3 30,3 30,3 31 18 26 18 23,9 24 35 30,3 - 30,3 32,1 22,1 22,1 22,1 30,3 35 18 28 28 45,1 30,3 54,3 30,3 55,3 30,3 35 18 22,1 45,1 60,3 30

Ireland 57,8 16 18 28 32,8 16 31 16 26 16 17,8 17,9 35 16 32,8 - 17,8 16 16 16 32,8 35 16 28 28 43,7 25 36,2 32,8 25 32,8 16 16 16 43,7 62,8 30

Italy 42,4 36 38 42,4 42,4 45,6 45,6 36 39,2 36 37,8 37,9 36 42,4 53,3 36 - 53,3 39,2 36 45,6 45,6 36 45,6 42,4 57,1 42,4 51,4 42,4 45,6 42,4 36 36 45,6 45,6 55,2 36

Latvia 54,8 29,8 31,8 29,8 25,9 29,8 31 25,9 26 25,9 27,7 27,8 35 29,8 25,9 25,9 31,6 - 22 29,8 33,7 35 25,9 28 28 47,7 29,8 53,8 29,8 29,8 29,8 35 25,9 29,8 47,7 45,4 30

Lithuania 71 46 48,1 46 27,8 46 31 27,8 26 27,8 29,6 29,7 46 46 27,8 27,8 29,6 24 - 46 46 46 27,8 28 28 49,1 46 70 46 71 46 46 27,8 46 33 46,8 30

Luxemb. 72,8 30,4 32,4 33,9 47,8 47,8 33,9 30,4 47,8 30,4 32,2 32,3 35 33,9 33,9 30,4 32,2 47,8 47,8 - 47,8 35 30,4 33,9 33,9 53,4 33,9 47,1 47,8 33,9 47,8 30,4 30,4 33,9 53,4 77,8 30,4

Macedonia 23,5 NA 25,5 28 19,3 23,5 31 19,3 NA 19,3 21 29,7 NA 23,5 NA NA 21,1 NA NA NA - NA 27,8 28 28 NA 25 35,4 20 25 19,3 NA 15 19,3 33 40,5 30

Malta 35 35 37 35 35 35 35 35 35 35 36,8 36,9 35 35 35 35 36,8 35 35 35 44,8 - 35 35 35 56,5 35 59 35 35 35 35 35 35 56,5 65 35

Netherla. 75,9 34,5 36,5 37,8 34,5 50,9 34,5 34,5 37,8 34,5 36,3 36,4 35 37,8 34,5 34,5 36,3 37,8 37,8 34,5 44,3 37,8 - 34,5 34,5 56,1 34,5 50,2 37,8 34,5 37,8 34,5 34,5 34,5 37,8 54,2 34,5

Norway 31,6 31,6 33,6 38,8 38,8 28 31,6 28 31,6 28 29,8 33,5 42,4 35,2 28 31,6 40,6 31,6 31,6 31,6 46 38,8 28 - 31,6 51,8 35,2 45,3 46 31,6 38,8 35,2 28 31,6 42,4 49,6 31,6

Poland 31,6 35,2 37,2 35,2 31,6 35,2 31,6 31,6 31,6 31,6 33,4 33,5 42,4 35,2 31,6 28 37 31,6 31,6 31,6 38,8 35 28 31,6 - 51,8 31,6 45,3 31,6 31,6 31,6 31,6 31,6 31,6 35,2 49,6 31,6

Portugal 74,8 33 35 39,7 49,8 49,8 39,7 33 49,8 33 34,8 34,9 35 39,7 49,8 33 34,8 49,8 49,8 33 49,8 49,8 33 39,7 39,7 - 39,7 73,8 49,8 74,8 49,8 33 33 39,7 55,1 79,8 33

Romania 32,5 36,3 30,8 32,5 28,8 32,5 32,5 32,5 32,5 28,8 34,3 34,4 35 28,8 32,5 27,3 34,3 32,5 32,5 28,8 36,3 35 25 32,5 28,8 49,8 - 43 32,5 32,5 28,8 32,5 32,5 32,5 36,3 47,5 32,5

Russia 31,6 24 33,6 35,4 27,8 27,8 31,6 31,6 35,4 24 29,6 29,7 35,4 31,6 35,4 31,6 29,6 35,4 35,4 31,6 35,4 35,4 27,8 39,2 31,6 49,1 35,4 - 27,8 31,6 31,6 27,8 27,8 27,8 33 46,8 31,6

Serbia 61 36 30 28 36 28 31 24 36 24 25,8 33,9 36 28 36 36 29,8 36 36 36 32 36 24 32 28 46,4 28 39,2 - 25 36 36 24 36 46,4 44 30

Slovak R. 61,3 32,5 30,8 32,5 28,8 32,5 31 36,3 36,3 28,8 34,3 30,7 36,3 28,8 36,3 25 38,1 32,5 36,3 28,8 36,3 35 25 28,8 28,8 49,8 32,5 43 28,8 - 28,8 28,8 25 28,8 33 47,5 30

Slovenia 61,3 28,8 30,8 36,3 36,3 32,5 31 28,8 36,3 46,8 30,5 38,2 36,3 32,5 36,3 36,3 34,3 36,3 36,3 36,3 36,3 36,3 28,8 36,3 28,8 49,8 28,8 43 36,3 28,8 - 36,3 28,8 28,8 49,8 66,3 30

Spain 71,7 35 37 38,3 46,7 46,7 38,3 35 46,7 35 36,8 36,9 35 38,3 46,7 35 36,8 46,7 46,7 35 46,7 46,7 35 41,5 38,3 56,5 41,5 50,6 46,7 38,3 46,7 - 35 41,5 56,5 76,7 35

Sweden 28 28 30 28 28 28 31 28 28 28 29,8 29,9 35 28 28 28 29,8 28 28 28 38,8 35 28 28 28 51,8 28 45,3 28 28 28 28 - 28 33 49,6 30

Switzerl. 28,2 28,2 34 28,2 28,2 50,9 31 24,4 50,9 28,2 26,2 30,1 35 32 28,2 32 37,5 50,9 50,9 24,4 35,7 50,9 24,4 28,2 28,2 49,3 32 42,5 50,9 28,2 28,2 32 24,4 - 50,9 50,9 30

Turkey 36,4 49,8 45,1 39,7 39,7 43,1 60,7 43,1 43,1 43,1 44,8 45 43,1 39,7 43,1 43,1 44,9 43,1 39,7 43,1 43,1 43,1 39,7 49,8 39,7 55,1 43,1 49,1 43,1 36,4 43,1 43,1 43,1 43,1 - 53,1 43,1

Ukraine 65,5 33,5 35,5 33,5 33,5 30 33,5 33,5 33,5 33,5 35,3 35,4 40,5 33,5 40,5 40,5 42,3 33,5 33,5 40,5 40,5 40,5 33,5 33,5 33,5 53,1 37 46,8 33,5 37 40,5 40,5 33,5 40,5 37 - 33,5

UK 55 30 32 30 30 30 31 30 30 30 31,8 31,9 35 30 30 30 31,8 30 30 30 40,5 35 30 30 30 53,1 30 46,8 30 30 30 30 30 30 33 51 -

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Albania - 36,3 37,9 28,8 32,5 36,3 31 36,3 36,3 46,8 38 38,2 35 28,8 36,3 36,3 34,2 36,3 36,3 36,3 36,3 35 36,3 28,8 28,8 49,8 32,5 43 36,3 61,3 36,3 36,3 28,8 28,8 33 61,3 36,3

Austria 75,5 - 35,7 34 34 40,6 40,6 34 37,3 34 35,8 36 35 40,6 50,5 34 35,7 50,5 50,5 34 50,5 43,9 34 37,3 51,8 55,8 43,9 49,8 50,5 40,6 37,3 34 34 34 50,5 50,5 34

Belgium 75,5 34 - 40,6 40,6 40,6 37,3 34 50,5 34 35,8 36 35 40,6 50,5 34 35,7 50,5 50,5 34 43,9 43,9 34 37,3 40,6 55,8 40,6 49,8 40,6 37,3 37,3 34 34 40,6 43,9 50,5 34

Bulgaria 27,3 23,5 32,8 - 27,3 27,3 31,2 27,3 35 31,2 29,1 37 35 31,2 35 27,3 32,9 35 35 27,3 35 35 27,3 35 31,2 48,7 31,2 41,9 27,3 31,2 35 27,3 31,2 27,3 33 42,6 31,2

Croatia 28 20 29,7 24 - 32 31 24 32 24 25,8 34 35 24 32 32 29,7 24 24 32 32 35 20 32 27 46,4 25 39,2 32 25 32 35 24 24 33 40 30

Cyprus 40 15 16,7 23,5 15 - 31 15 26 39,7 16,8 17 35 15 15 15 16,7 15 15 15 27,8 35 15 28 27 43,1 25 35,4 15 25 15 35 15 15 43,1 36,3 30

Czech R. 34,5 37,9 36,1 37,9 34,5 37,9 - 41,4 34,5 34,5 39,7 36,4 41,4 34,5 34,5 34,5 43,1 34,5 34,5 34,5 41,4 35 31 34,5 31 53,8 37,9 47,6 34,5 34,5 34,5 34,5 31 34,5 53,8 48,3 34,5

Denmark 74,6 30 31,7 33,5 33,5 37 40,5 - 33,5 30 31,8 32 35 33,5 30 30 31,7 33,5 33,5 30 40,5 35 30 30 30 53,1 37 46,8 33,5 40,5 33,5 30 30 30 40,5 47,5 30

Estonia 51 26 27,7 26 26 26 31 26 - 26 27,8 28 35 26 26 26 27,7 26 26 26 37,1 35 26 28 27 50,4 26 50 26 51 26 35 26 26 50,4 44,5 30

Finland 74,6 29 30,7 36,1 32,6 49,6 32,6 29 29 - 30,8 31 35 32,6 29 29 30,7 29 29 29 39,7 35 29 29 29 52,4 32,6 46 49,6 32,6 32,6 29 29 29 39,7 46,8 30

France 76,6 35,4 37,1 38,7 38,7 41,9 41,9 35,4 38,7 35,4 - 37,4 35,4 35,4 38,7 35,4 37,1 38,7 38,7 35,4 45,1 38,7 35,4 35,4 38,7 56,7 41,9 50,9 51,6 41,9 38,7 35,4 35,4 35,4 45,1 51,6 35,4

Germany 79,7 39,6 41,3 48,7 48,7 45,6 42,6 39,6 42,6 39,6 41,4 - 39,6 42,6 42,6 39,6 41,3 42,6 42,6 39,6 48,7 42,6 39,6 39,6 42,6 59,5 45,6 54,1 48,7 42,6 48,7 39,6 39,6 42,6 48,7 54,7 39,6

Greece 35 35 36,7 35 35 35 35 35 35 35 36,8 37 - 35 35 35 36,7 35 35 35 44,8 35 35 35 35 56,5 35 59 35 35 35 35 35 35 56,5 60 35

Hungary 22,1 26,2 27,9 26,2 22,1 22,1 31 22,1 34,4 22,1 23,9 24,1 35 - 34,4 22,1 27,9 34,4 34,4 22,1 30,3 35 22,1 28 27 45,1 25 37,7 22,1 25 26,2 22,1 22,1 26,2 33 38,5 30

Iceland 55,3 30,3 32 30,3 30,3 30,3 31 18 26 18 23,9 24,1 35 30,3 - 30,3 32 22,1 22,1 22,1 30,3 35 18 28 27 45,1 30,3 54,3 30,3 55,3 30,3 22,1 18 22,1 45,1 55,3 30

Ireland 55 12,5 14,2 23,5 30 12,5 31 12,5 26 12,5 14,3 14,5 35 12,5 30 - 14,2 12,5 12,5 12,5 30 35 12,5 28 27 41,4 25 33,5 30 25 12,5 12,5 12,5 12,5 41,4 55 30

Italy 40,6 34 35,7 40,6 40,6 43,9 43,9 34 37,3 34 35,8 36 35 40,6 51,8 34 - 51,8 37,3 34 43,9 43,9 34 43,9 40,6 55,8 40,6 49,8 40,6 43,9 40,6 34 34 43,9 43,9 50,5 34

Latvia 52,1 27,1 28,8 27,1 23,1 27,1 31 23,1 26 23,1 24,8 25 35 27,1 23,1 23,1 28,8 - 19 27,1 31,2 35 23,1 28 27 45,7 27,1 51,1 27,1 27,1 23,1 35 23,1 23,1 45,7 39,3 30

Lithuania 64,7 39,7 41,3 39,7 19,3 39,7 31 19,3 26 19,3 21 21,2 39,7 39,7 19,3 19,3 21 15 - 39,7 39,7 39,7 19,3 28 27 43,1 25 63,7 39,7 25 19,3 39,7 19,3 19,3 33 36,3 30

Luxemb. 69,3 30,4 32,1 33,9 44,3 44,3 33,9 30,4 44,3 30,4 32,2 32,4 35 33,9 33,9 30,4 32,1 44,3 44,3 - 44,3 35 30,4 33,9 33,9 53,4 33,9 47,1 44,3 33,9 33,9 30,4 30,4 33,9 53,4 69,3 30,4

Macedonia 23,5 NA 25,2 23,5 19,3 23,5 31 19,3 NA 15 21 29,7 NA 19,3 NA NA 21 NA NA NA - NA 27,8 28 27 NA 25 35,4 19,3 25 19,3 NA 15 19,3 33 36,3 30

Malta 35 35 36,7 35 35 35 35 35 35 35 36,8 37 35 35 35 35 36,7 35 35 35 44,8 - 35 35 35 56,5 35 59 35 35 35 35 35 35 56,5 60 35

Netherla. 75,9 34,5 36,2 37,8 34,5 50,9 34,5 34,5 37,8 34,5 36,3 36,5 35 37,8 34,5 34,5 36,2 37,8 37,8 34,5 44,3 37,8 - 34,5 34,5 56,1 34,5 50,2 37,8 34,5 37,8 34,5 34,5 34,5 37,8 50,9 34,5

Norway 31,6 31,6 33,3 38,8 38,8 28 31,6 28 31,6 28 29,8 33,6 42,4 35,2 28 31,6 40,5 31,6 31,6 31,6 46 38,8 28 - 31,6 51,8 35,2 45,3 46 31,6 38,8 35,2 28 31,6 42,4 46 31,6

Poland 30,7 34,3 36 34,3 30,7 34,3 31 30,7 30,7 30,7 32,4 32,6 41,6 34,3 30,7 27 36 30,7 30,7 30,7 38 35 27 30,7 - 51,1 30,7 44,5 30,7 30,7 30,7 30,7 30,7 30,7 34,3 45,3 30,7

Portugal 74,8 33 34,7 39,7 49,8 49,8 39,7 33 49,8 33 34,8 35 35 39,7 39,7 33 34,7 49,8 49,8 33 49,8 39,7 33 39,7 39,7 - 39,7 49,1 49,8 74,8 49,8 33 33 39,7 55,1 49,8 33

Romania 32,5 36,3 30,4 32,5 28,8 32,5 32,5 32,5 32,5 28,8 34,3 34,5 35 28,8 32,5 27,3 34,2 32,5 32,5 28,8 36,3 35 25 32,5 28,8 49,8 - 43 32,5 32,5 28,8 32,5 32,5 32,5 36,3 43,8 32,5

Russia 31,6 27,8 33,3 35,4 27,8 27,8 31,6 31,6 35,4 27,8 29,6 29,8 35,4 31,6 35,4 31,6 29,5 35,4 35,4 31,6 35,4 35,4 27,8 31,6 31,6 49,1 35,4 - 27,8 31,6 31,6 27,8 27,8 27,8 33 43 31,6

Serbia 56,2 31,2 24,3 23,5 31,2 22,6 31 18,3 31,2 18,3 20,1 28,9 35 18,3 31,2 31,2 24,3 31,2 31,2 31,2 26,9 35 18,3 28 27 42,4 25 34,6 - 25 31,2 35 18,3 31,2 42,4 35,5 30

Slovak R. 61,3 32,5 30,4 32,5 28,8 32,5 31 36,3 36,3 28,8 34,3 30,7 36,3 28,8 36,3 25 38 32,5 32,5 28,8 36,3 35 25 28,8 28,8 49,8 32,5 43 28,8 - 28,8 28,8 25 28,8 33 43,8 30

Slovenia 61,3 28,8 30,4 36,3 36,3 32,5 31 28,8 36,3 46,8 30,5 38,2 36,3 32,5 36,3 28,8 34,2 28,8 28,8 28,8 36,3 36,3 28,8 36,3 28,8 49,8 28,8 43 36,3 28,8 - 28,8 28,8 28,8 49,8 61,3 30

Spain 69,8 35 36,7 38,3 44,8 44,8 38,3 35 44,8 35 36,8 37 35 38,3 38,3 35 36,7 44,8 44,8 35 44,8 44,8 35 41,5 38,3 56,5 41,5 50,6 44,8 38,3 38,3 - 35 41,5 56,5 69,8 35

Sweden 28 28 29,7 28 28 28 31 28 28 28 29,8 30 35 28 28 28 29,7 28 28 28 38,8 35 28 28 28 51,8 28 45,3 28 28 28 28 - 28 33 46 30

Switzerl. 27,9 27,9 33,4 27,9 27,9 50,7 31 24,1 50,7 27,9 25,9 29,9 35 31,7 27,9 31,7 37,2 27,9 27,9 24,1 35,5 50,7 24,1 28 27,9 49,1 31,7 42,3 50,7 27,9 27,9 31,7 24,1 - 50,7 43,1 30

Turkey 36,4 49,8 44,7 39,7 39,7 39,7 58,4 43,1 39,7 43,1 44,8 45 39,7 39,7 39,7 39,7 44,8 39,7 39,7 39,7 43,1 39,7 39,7 49,8 39,7 55,1 43,1 49,1 39,7 36,4 39,7 39,7 43,1 39,7 - 49,8 43,1

Ukraine 61,3 28,8 30,4 28,8 28,8 25 31 28,8 28,8 28,8 30,5 30,7 36,3 28,8 36,3 36,3 38 28,8 28,8 36,3 36,3 36,3 28,8 28,8 28,8 49,8 32,5 43 28,8 32,5 36,3 36,3 28,8 28,8 33 - 30

UK 55 30 31,7 30 30 30 31 30 30 30 31,8 32 35 30 30 30 31,7 30 30 30 40,5 35 30 30 30 53,1 30 46,8 30 30 30 30 30 30 33 47,5 -

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Albania - 36,3 37,9 28,8 32,5 36,3 28,8 36,3 36,3 46,8 38 38,2 35 28,8 36,3 36,3 34,2 36,3 36,3 36,3 36,3 35 36,3 28,8 28,8 45,6 32,5 43 36,3 36,3 36,3 36,3 28,8 28,8 30 61,3 36,3

Austria 75,5 - 35,7 34 34 34 34 34 37,3 34 35,8 35,9 35 34 50,5 34 35,7 34 34 34 50,5 35 34 34 46,5 52,2 43,9 49,8 50,5 34 34 34 34 34 50,5 50,5 34

Belgium 75,5 34 - 40,6 40,6 34 34 34 37,3 34 35,8 35,9 35 34 37,3 34 35,6 34 34 34 43,9 35 34 34 34 52,1 37,3 49,8 40,6 34 34 34 34 40,6 43,9 50,5 34

Bulgaria 23,5 19,5 29,2 - 23,5 23,5 28 23,5 31,6 27,6 25,3 33,5 35 27,6 31,6 23,5 29,2 31,6 31,6 23,5 31,6 35 23,5 31,6 27,6 41,6 27,6 38,8 23,5 27,6 31,6 23,5 27,6 23,5 30 39,6 30

Croatia 28 20 29,7 24 - 32 28 24 32 24 25,8 33,9 35 24 32 24 29,7 24 24 32 32 35 20 32 24 42 25 39,2 32 24 32 35 24 24 30 40 30

Cyprus 40 15 16,7 19,5 15 - 28 15 26 39,7 16,8 16,9 35 15 15 15 16,7 15 15 15 27,8 35 15 28 19 38,4 25 35,4 15 15 15 35 15 15 40,5 36,3 30

Czech R. 31,6 28 29,7 35,2 31,6 28 - 28 31,6 28 29,8 29,9 35 28 31,6 28 29,7 28 28 28 38,8 35 28 28 28 47,8 35,2 45,3 31,6 28 28 28 28 31,6 35,2 46 30

Denmark 74,6 30 31,7 33,5 33,5 30 30 - 33,5 30 31,8 31,9 35 30 30 30 31,7 30 30 30 40,5 35 30 30 30 49,3 37 46,8 33,5 30 30 30 30 30 40,5 47,5 30

Estonia 51 26 27,7 26 26 26 28 26 - 26 27,8 27,9 35 26 26 26 27,7 26 26 26 37,1 35 26 28 26 46,4 26 50 26 26 26 35 26 26 48,2 44,5 30

Finland 74,6 29 30,7 36,1 32,6 29 29 29 29 - 30,8 30,9 35 29 29 29 30,7 29 29 29 39,7 35 29 29 29 48,5 32,6 46 49,6 29 29 29 29 29 39,7 46,8 30

France 76,6 35,4 37,1 38,7 38,7 35,4 35,4 35,4 38,7 35,4 - 37,4 35,4 35,4 38,7 35,4 37,1 35,4 35,4 35,4 45,1 35,4 35,4 35,4 35,4 53,2 41,9 50,9 38,7 35,4 35,4 35,4 35,4 35,4 45,1 51,6 35,4

Germany 79,2 38,9 40,6 48,1 48,1 38,9 38,9 38,9 42 38,9 40,7 - 38,9 38,9 42 38,9 40,6 38,9 38,9 38,9 48,1 38,9 38,9 38,9 38,9 55,7 38,9 53,6 48,1 38,9 38,9 38,9 38,9 42 48,1 54,2 38,9

Greece 35 35 36,7 35 35 35 35 35 35 35 36,8 36,9 - 35 35 35 36,7 35 35 35 44,8 35 35 35 35 52,9 35 59 35 35 35 35 35 35 54,5 51,3 35

Hungary 20,2 16 17,7 24,4 20,2 16 28 16 32,8 16 17,8 17,9 35 - 32,8 16 17,7 16 16 16 28,6 35 16 28 19 39,1 25 36,2 20,2 16 16 16 16 24,4 30 37 30

Iceland 55,3 30,3 23,8 30,3 30,3 30,3 28 18 26 18 23,9 24 35 30,3 - 30,3 32 22,1 22,1 22,1 30,3 35 18 28 22,1 40,6 30,3 37,7 30,3 22,1 30,3 22,1 18 22,1 42,6 55,3 30

Ireland 55 12,5 14,2 19,5 12,5 12,5 28 12,5 26 12,5 14,3 14,4 35 12,5 30 - 14,2 12,5 12,5 12,5 30 35 12,5 28 19 36,6 25 33,5 30 12,5 12,5 12,5 12,5 12,5 38,8 55 30

Italy 39,7 33 34,7 39,7 39,7 33 33 33 36,4 33 34,8 34,9 35 33 51,1 33 - 33 33 33 43,1 35 33 33 33 51,4 39,7 49,1 39,7 33 33 33 33 43,1 43,1 49,8 33

Latvia 48,5 15 16,7 23,5 19,3 15 28 15 26 15 16,8 16,9 35 15 19,3 15 16,7 - 15 15 27,8 35 15 28 19 38,4 25 47,5 23,5 15 15 35 15 19,3 30 36,3 30

Lithuania 52,8 15 16,7 27,8 19,3 15 28 15 26 15 16,8 16,9 35 15 19,3 15 16,7 15 - 15 27,8 35 15 28 19 38,4 25 51,8 27,8 15 15 15 15 19,3 30 36,3 30

Luxemb. 69,3 30,4 32,1 33,9 44,3 30,4 30,4 30,4 44,3 30,4 32,2 32,3 35 30,4 33,9 30,4 32 30,4 30,4 - 44,3 35 30,4 30,4 30,4 49,5 33,9 47,1 44,3 30,4 30,4 30,4 30,4 33,9 51,3 69,3 30,4

Macedonia 23,5 NA 25,2 19,5 19,3 23,5 28 19,3 NA 15 21 29,7 NA 19,3 NA NA 20,9 NA NA NA - NA 27,8 28 19,3 NA 25 35,4 19,3 19,3 19,3 NA 15 19,3 30 36,3 30

Malta 35 35 36,7 35 35 35 35 35 35 35 36,8 36,9 35 35 35 35 36,7 35 35 35 44,8 - 35 35 35 52,9 35 59 35 35 35 35 35 35 54,5 60 35

Netherla. 75,9 34,5 36,2 37,8 34,5 34,5 34,5 34,5 37,8 34,5 36,3 36,4 35 34,5 34,5 34,5 36,2 34,5 34,5 34,5 44,3 35 - 34,5 34,5 52,5 34,5 50,2 37,8 34,5 34,5 34,5 34,5 34,5 37,8 50,9 34,5

Norway 31,6 28 29,7 38,8 38,8 28 28 28 31,6 28 29,8 29,9 35 28 28 28 29,7 28 28 28 46 35 28 - 28 47,8 35,2 45,3 46 28 28 28 28 31,6 42,4 46 30

Poland 23,1 19 20,7 27,1 23,1 19 28 19 26 19 20,8 20,9 35 19 23,1 19 20,7 19 19 19 31,2 35 19 28 - 41,3 25 38,4 23,1 19 19 19 19 23,1 30 39,3 30

Portugal 70,6 27,5 29,2 34,8 45,6 27,5 28 27,5 45,6 27,5 29,3 29,4 35 27,5 34,8 27,5 29,2 27,5 27,5 27,5 45,6 35 27,5 28 27,5 - 34,8 44,9 45,6 27,5 27,5 27,5 27,5 34,8 49,3 45,6 30

Romania 32,5 36,3 30,4 32,5 28,8 32,5 32,5 32,5 32,5 28,8 34,3 30,7 35 28,8 32,5 27,3 34,2 32,5 32,5 28,8 36,3 35 25 32,5 28,8 45,6 - 43 32,5 32,5 28,8 32,5 32,5 32,5 36,3 43,8 32,5

Russia 31,6 27,8 33,3 35,4 27,8 27,8 31,6 31,6 35,4 27,8 29,6 29,7 35,4 31,6 27,8 31,6 29,5 35,4 35,4 31,6 35,4 35,4 27,8 31,6 31,6 44,9 35,4 - 27,8 31,6 31,6 27,8 27,8 27,8 31,6 43 31,6

Serbia 56,2 31,2 24,3 19,5 31,2 22,6 28 18,3 31,2 18,3 20,1 28,8 35 18,3 31,2 31,2 24,3 31,2 31,2 31,2 26,9 35 18,3 28 19 37,7 25 34,6 - 18,3 18,3 35 18,3 31,2 39,8 35,5 30

Slovak R. 44 19 20,7 19,5 19 19 28 19 26 19 20,8 20,9 35 19 19 19 20,7 19 19 19 31,2 35 19 28 19 41,3 25 38,4 19 - 19 19 19 19 30 39,3 30

Slovenia 61,3 25 26,7 36,3 36,3 25 28 25 36,3 46,8 26,8 26,9 35 25 36,3 25 26,7 25 25 25 36,3 35 25 28 25 45,6 28,8 43 28,8 25 - 25 25 28,8 32,5 61,3 30

Spain 69,8 35 36,7 38,3 44,8 35 35 35 44,8 35 36,8 36,9 35 35 38,3 35 36,7 35 35 35 44,8 35 35 35 35 52,9 41,5 50,6 44,8 35 35 - 35 41,5 44,8 69,8 35

Sweden 28 28 29,7 28 28 28 28 28 28 28 29,8 29,9 35 28 28 28 29,7 28 28 28 38,8 35 28 28 28 47,8 28 45,3 28 28 28 28 - 28 30 46 30

Switzerl. 27,9 27,9 33,4 27,9 27,9 50,7 28 24,1 50,7 27,9 25,9 26 35 31,7 27,9 31,7 37,1 27,9 27,9 24,1 35,5 50,7 24,1 28 27,9 45 31,7 42,3 50,7 27,9 27,9 31,7 24,1 - 50,7 43,1 30

Turkey 33,5 47,5 42,2 37 37 37 37 40,5 37 40,5 42,3 42,4 37 37 37 37 42,2 37 37 37 40,5 37 37 47,5 37 49,3 40,5 46,8 37 33,5 37 33,5 40,5 37 - 47,5 40,5

Ukraine 61,3 28,8 30,4 28,8 28,8 25 28,8 28,8 28,8 28,8 30,5 30,7 35 28,8 36,3 36,3 37,9 28,8 28,8 36,3 36,3 36,3 28,8 28,8 28,8 45,6 32,5 43 28,8 32,5 36,3 36,3 28,8 28,8 32,5 - 30

UK 55 30 31,7 30 30 30 30 30 30 30 31,8 31,9 35 30 30 30 31,7 30 30 30 40,5 35 30 30 30 49,3 30 46,8 30 30 30 30 30 30 30 47,5 -

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Albania - 30,7 28,5 26,9 30,7 30,7 26,9 30,7 30,7 43 32,4 32,6 32 26,9 30,7 30,7 32,4 30,7 30,7 30,7 34,6 35 30,7 28 26,9 44,2 30,7 41,5 30,7 30,7 30,7 35 26,9 26,9 30 55,7 30,7

Austria 66,8 - 26,7 25 25 25 26 25 28,8 25 26,7 26,9 32 25 43,8 25 26,7 25 25 25 43,8 35 25 28 39,3 45,6 36,3 43 43,8 25 25 25 25 25 43,8 43,8 30

Belgium 37,3 34 - 40,6 37,3 34 34 34 37,3 34 35,7 35,9 34 34 37,3 34 35,6 34 34 34 43,9 35 34 34 34 52,1 37,3 49,8 40,6 34 34 34 34 34 43,9 50,5 34

Bulgaria 19,3 15 25,2 - 19,3 19,3 26 19,3 27,8 23,5 21 29,7 32 23,5 27,8 19,3 25,2 19,3 27,8 19,3 27,8 35 19,3 28 23,5 38,4 23,5 35,4 19,3 23,5 19,3 19,3 23,5 19,3 30 36,3 30

Croatia 28 20 29,7 24 - 32 26 24 24 24 25,7 33,9 32 24 32 24 29,7 24 24 32 32 35 20 32 24 42 24 39,2 24 24 32 35 24 24 30 40 30

Cyprus 33 10 11,7 15 10 - 26 10 24 33,4 11,7 11,9 32 10 10 12,5 11,7 10 10 10 23,5 35 10 28 19 34,8 16 31,6 10 10 10 35 10 10 37 32,5 30

Czech R. 29,7 26 27,7 33,4 29,7 26 - 26 29,7 26 27,7 27,9 32 26 29,7 26 27,7 26 26 26 37,1 35 26 28 26 46,4 33,4 43,8 29,7 26 26 26 26 26 33,4 44,5 30

Denmark 71,2 28 29,7 31,6 31,6 28 28 - 31,6 28 29,7 29,9 32 28 28 28 29,7 28 28 28 38,8 35 28 28 28 47,8 35,2 45,3 31,6 28 28 28 28 28 38,8 46 30

Estonia 47 24 25,7 24 24 24 26 24 - 24 25,7 25,9 32 24 24 24 25,7 24 24 24 35,4 35 24 28 24 44,9 24 48 24 24 24 24 24 24 46,8 43 30

Finland 69,7 26 27,7 33,4 29,7 26 26 26 26 - 27,7 27,9 32 26 26 26 27,7 26 26 26 37,1 35 26 28 26 46,4 29,7 43,8 46,7 26 26 26 26 26 37,1 44,5 30

France 74,2 35 36,6 38,2 38,2 35 35 35 38,2 35 - 36,9 35 35 38,2 35 36,6 35 35 35 44,7 35 35 35 35 52,8 41,5 50,6 38,2 35 35 35 35 35 44,7 51,2 35

Germany 74,1 38,9 40,6 48,1 48,1 38,9 38,9 38,9 42 38,9 40,6 - 38,9 38,9 42 38,9 40,6 38,9 38,9 38,9 48,1 38,9 38,9 38,9 38,9 55,7 38,9 53,6 48,1 38,9 38,9 38,9 38,9 38,9 48,1 54,2 38,9

Greece 32 32 33,7 32 32 32 32 32 32 32 33,7 33,9 - 32 32 32 33,7 32 32 32 42,2 35 32 32 32 50,7 32 56 32 32 32 32 32 32 32 49 32

Hungary 20,2 16 17,7 24,4 20,2 16 26 16 24 16 17,7 17,9 32 - 32,8 16 17,7 16 16 16 28,6 35 16 28 19 39,1 20,2 36,2 20,2 16 16 16 16 16 30 37 30

Iceland 53,3 30,3 23,8 30,3 30,3 30,3 26 18 24 18 23,8 24 32 30,3 - 22,1 32 22,1 22,1 22,1 30,3 35 18 28 22,1 40,6 30,3 37,7 30,3 22,1 30,3 22,1 18 22,1 42,6 55,3 30

Ireland 53 12,5 14,2 15 12,5 12,5 26 12,5 24 12,5 14,2 14,4 32 12,5 12,5 - 14,2 12,5 12,5 12,5 30 35 12,5 28 19 36,6 16 33,5 30 12,5 12,5 12,5 12,5 12,5 38,8 55 30

Italy 39,7 33 34,7 39,7 39,7 33 33 33 36,4 33 34,7 34,9 33 33 51,1 33 - 33 33 33 43,1 35 33 33 33 51,4 39,7 49,1 39,7 33 33 33 33 33 43,1 49,8 33

Latvia 46,5 15 16,7 19,3 19,3 15 26 15 24 15 16,7 16,9 32 15 19,3 15 16,7 - 15 15 27,8 35 15 28 19 38,4 23,5 47,5 23,5 15 15 15 15 15 30 36,3 30

Lithuania 50,8 15 16,7 27,8 19,3 15 26 15 24 15 16,7 16,9 32 15 19,3 15 16,7 15 - 15 27,8 35 15 28 19 38,4 23,5 51,8 27,8 15 15 15 15 15 30 36,3 30

Luxemb. 67,3 30,4 32,1 33,9 44,3 30,4 30,4 30,4 44,3 30,4 32,1 32,3 32 30,4 33,9 30,4 32 30,4 30,4 - 44,3 35 30,4 30,4 30,4 49,5 33,9 47,1 44,3 30,4 30,4 30,4 30,4 30,4 51,3 69,3 30,4

Macedonia 23,5 NA 25,2 19,3 19,3 23,5 26 19,3 NA 15 16,7 29,7 NA 19,3 NA NA 20,9 NA NA NA - NA 27,8 28 19,3 NA 19,3 35,4 19,3 19,3 19,3 NA 15 19,3 30 36,3 30

Malta 35 35 36,7 35 35 35 35 35 35 35 36,7 36,9 35 35 35 35 36,7 35 35 35 44,8 - 35 35 35 52,9 35 59 35 35 35 35 35 35 54,5 60 35

Netherla. 71,6 31,5 33,2 34,9 31,5 31,5 31,5 31,5 34,9 31,5 33,2 33,4 32 31,5 31,5 31,5 33,2 31,5 31,5 31,5 41,8 35 - 31,5 31,5 50,3 31,5 47,9 34,9 31,5 31,5 31,5 31,5 31,5 34,9 48,6 31,5

Norway 31,6 28 29,7 38,8 38,8 28 28 28 31,6 28 29,7 29,9 32 28 28 28 29,7 28 28 28 46 35 28 - 28 47,8 35,2 45,3 46 28 28 28 28 28 42,4 46 30

Poland 23,1 19 20,7 27,1 23,1 19 26 19 24 19 20,7 20,9 32 19 23,1 19 20,7 19 19 19 31,2 35 19 28 - 41,3 23,1 38,4 23,1 19 19 19 19 19 30 39,3 30

Portugal 68,6 27,5 29,2 34,8 45,6 27,5 27,5 27,5 34,8 27,5 29,2 29,4 32 27,5 34,8 27,5 29,2 27,5 27,5 27,5 45,6 35 27,5 28 27,5 - 34,8 44,9 45,6 27,5 27,5 27,5 27,5 27,5 49,3 45,6 30

Romania 24,4 28,6 21,9 24,4 20,2 24,4 26 24,4 28,6 20,2 26,1 22,1 32 20,2 28,6 18,5 26,1 24,4 24,4 20,2 28,6 35 16 28 20,2 39,1 - 36,2 24,4 24,4 20,2 24,4 24,4 24,4 30 37 30

Russia 31,6 27,8 33,3 35,4 27,8 27,8 31,6 31,6 35,4 27,8 29,5 29,7 35,4 31,6 27,8 31,6 29,5 35,4 35,4 31,6 35,4 35,4 27,8 31,6 31,6 44,9 35,4 - 27,8 31,6 31,6 27,8 27,8 27,8 31,6 43 31,6

Serbia 51 28 20,7 15 14,5 19 26 14,5 28 14,5 16,2 25,4 32 14,5 28 28 20,7 28 28 28 23,5 35 14,5 28 19 34,8 19 31,6 - 14,5 14,5 35 14,5 28 37 32,5 30

Slovak R. 42 19 20,7 19 19 19 26 19 24 19 20,7 20,9 32 19 19 19 20,7 19 19 19 31,2 35 19 28 19 41,3 19 38,4 19 - 19 19 19 19 30 39,3 30

Slovenia 66,8 25 26,7 28,8 43,8 25 26 25 43,8 25 26,7 26,9 32 25 43,8 25 26,7 25 25 25 36,3 35 25 28 25 45,6 28,8 43 28,8 25 - 25 25 25 32,5 68,8 30

Spain 67,8 35 36,7 38,3 44,8 35 35 35 38,3 35 36,7 36,9 35 35 38,3 35 36,7 35 35 35 44,8 35 35 35 35 52,9 41,5 50,6 44,8 35 35 - 35 35 44,8 69,8 35

Sweden 28 28 29,7 28 28 28 28 28 28 28 29,7 29,9 32 28 28 28 29,7 28 28 28 38,8 35 28 28 28 47,8 28 45,3 28 28 28 28 - 28 30 46 30

Switzerl. 27,9 24,1 25,8 27,9 27,9 24,1 26 24,1 27,9 24,1 25,8 26 32 24,1 27,9 24,1 25,8 24,1 24,1 24,1 35,5 35 24,1 28 24,1 45 31,7 42,3 50,7 24,1 24,1 24,1 24,1 - 50,7 43,1 30

Turkey 33,5 47,5 42,2 37 37 37 37 40,5 37 40,5 42,2 42,4 40,5 37 37 37 42,2 37 37 37 40,5 37 37 47,5 37 49,3 40,5 46,8 37 33,5 37 33,5 40,5 37 - 47,5 40,5

Ukraine 59,3 28,8 30,4 28,8 28,8 25 28,8 28,8 28,8 28,8 30,5 30,7 32 28,8 36,3 36,3 30,4 28,8 28,8 36,3 36,3 36,3 28,8 28,8 28,8 45,6 32,5 43 28,8 32,5 36,3 36,3 28,8 28,8 32,5 - 30

UK 53 30 31,7 30 30 30 30 30 30 30 31,7 31,9 32 30 30 30 31,7 30 30 30 40,5 35 30 30 30 49,3 30 46,8 30 30 30 30 30 30 30 47,5 -

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Albania - 28 25,7 24 28 28 24 28 28 40,8 25,7 29,9 29 24 28 28 29,7 28 28 28 32 35 20 28 24 42 28 39,2 24 28 28 35 24 24 24 53 30

Austria 63,8 - 26,7 25 25 25 25 25 28,8 25 26,7 26,9 29 25 43,8 25 26,7 25 25 25 43,8 35 25 28 25 45,6 36,3 43 43,8 25 25 25 25 25 43,8 43,8 30

Belgium 37,3 34 - 40,6 37,3 34 34 34 37,3 34 35,7 35,9 34 34 37,3 34 35,6 34 34 34 43,9 35 34 34 34 52,1 37,3 49,8 40,6 34 34 34 34 34 43,9 50,5 34

Bulgaria 19,3 15 25,2 - 19,3 19,3 24 19,3 27,8 23,5 21 29,7 29 23,5 27,8 19,3 25,2 19,3 27,8 19,3 27,8 35 19,3 28 23,5 38,4 23,5 35,4 19,3 23,5 19,3 19,3 23,5 19,3 23,5 36,3 30

Croatia 20 20 21,7 20 - 20 24 20 20 20 21,7 21,9 29 20 20 20 21,7 20 20 20 32 35 20 28 20 42 20 39,2 20 20 20 35 20 20 20 40 30

Cyprus 30 10 11,7 15 10 - 24 10 10 33,4 11,7 11,9 29 10 10 12,5 11,7 10 10 10 23,5 35 10 28 19 34,8 16 31,6 10 10 10 35 10 10 28 32,5 30

Czech R. 27,8 24 25,7 31,6 27,8 24 - 24 27,8 24 25,7 25,9 29 24 27,8 24 25,7 24 24 24 35,4 35 24 28 24 44,9 31,6 42,2 31,6 24 24 24 24 24 31,6 43 30

Denmark 68,2 28 29,7 31,6 31,6 28 28 - 31,6 28 29,7 29,9 29 28 28 28 29,7 28 28 28 38,8 35 28 28 28 47,8 35,2 45,3 31,6 28 28 28 28 28 38,8 46 30

Estonia 43 23 24,7 23 23 23 24 23 - 23 24,7 24,9 29 23 23 23 24,7 23 23 23 34,6 35 23 28 23 44,2 23 47 23 23 23 23 23 23 23 42,3 30

Finland 66,7 26 27,7 33,4 29,7 26 26 26 26 - 27,7 27,9 29 26 26 26 27,7 26 26 26 37,1 35 26 28 26 46,4 29,7 43,8 46,7 26 26 26 26 26 37,1 44,5 30

France 37,7 34,4 36,1 37,7 34,4 34,4 34,4 34,4 37,7 34,4 - 36,4 34,4 34,4 37,7 34,4 36,1 34,4 34,4 34,4 44,3 35 34,4 34,4 34,4 52,5 41 50,2 37,7 34,4 34,4 34,4 34,4 34,4 44,3 50,8 34,4

Germany 71,1 38,9 40,6 48,1 48,1 38,9 38,9 38,9 42 38,9 40,6 - 38,9 38,9 42 38,9 40,6 38,9 38,9 38,9 48,1 38,9 38,9 38,9 38,9 55,7 38,9 53,6 48,1 38,9 38,9 38,9 38,9 38,9 48,1 54,2 38,9

Greece 29 29 30,7 29 29 29 29 29 29 29 30,7 30,9 - 29 29 29 30,7 29 29 29 39,7 35 29 29 29 48,5 29 53 29 29 29 29 29 29 29 46,8 30

Hungary 17,3 17,3 19 17,3 17,3 17,3 24 17,3 17,3 17,3 19,1 19,3 29 - 17,3 17,3 19 17,3 17,3 17,3 29,7 35 17,3 28 19 40,1 17,3 37,2 17,3 17,3 17,3 17,3 17,3 17,3 20 38 30

Iceland 50,3 30,3 23,8 30,3 30,3 30,3 24 18 22,1 18 23,8 24 30,3 30,3 - 22,1 32 22,1 22,1 22,1 30,3 35 18 28 22,1 40,6 30,3 37,7 30,3 22,1 30,3 22,1 18 22,1 34,4 55,3 30

Ireland 50 12,5 14,2 15 12,5 12,5 24 12,5 12,5 12,5 14,2 14,4 29 12,5 12,5 - 14,2 12,5 12,5 12,5 30 35 12,5 28 19 36,6 16 33,5 30 12,5 12,5 12,5 12,5 12,5 30 55 30

Italy 39,7 33 34,7 39,7 39,7 33 33 33 36,4 33 34,7 34,9 33 33 51,1 33 - 33 33 33 43,1 35 33 33 33 51,4 39,7 49,1 39,7 33 33 33 33 33 43,1 49,8 33

Latvia 43,5 15 16,7 19,3 19,3 15 24 15 15 15 16,7 16,9 29 15 19,3 15 16,7 - 15 15 27,8 35 15 28 19 38,4 23,5 47,5 23,5 15 15 15 15 15 23,5 36,3 30

Lithuania 47,8 15 16,7 27,8 19,3 15 24 15 19,3 15 16,7 16,9 29 15 19,3 15 16,7 15 - 15 27,8 35 15 28 19 38,4 23,5 35,4 27,8 15 15 15 15 15 23,5 36,3 30

Luxemb. 63,7 29,6 31,3 33,1 43,7 29,6 29,6 29,6 43,7 29,6 31,4 31,6 29,6 29,6 33,1 29,6 31,3 29,6 29,6 - 43,7 35 29,6 29,6 29,6 49 33,1 46,5 43,7 29,6 29,6 29,6 29,6 29,6 33,1 68,7 30

Macedonia 23,5 27,8 25,2 19,3 19,3 23,5 24 19,3 27,8 15 16,7 29,7 29 19,3 27,8 27,8 20,9 27,8 27,8 27,8 - 35 27,8 28 19,3 38,4 19,3 35,4 19,3 19,3 19,3 19,3 15 19,3 20 36,3 30

Malta 35 35 36,7 35 35 35 35 35 35 35 36,7 36,9 35 35 35 35 36,7 35 35 35 44,8 - 35 35 35 52,9 35 59 35 35 35 35 35 35 48 60 35

Netherla. 33,1 29,6 31,3 33,1 29,6 29,6 29,6 29,6 33,1 29,6 31,3 31,5 29,6 29,6 29,6 29,6 31,3 29,6 29,6 29,6 40,2 35 - 29,6 29,6 49 29,6 46,5 33,1 29,6 29,6 29,6 29,6 29,6 33,1 47,2 30

Norway 31,6 28 29,7 38,8 38,8 28 28 28 31,6 28 29,7 29,9 29 28 28 28 29,7 28 28 28 46 35 28 - 28 47,8 35,2 45,3 46 28 28 28 28 28 42,4 46 30

Poland 23,1 19 20,7 27,1 23,1 19 24 19 23,1 19 20,7 20,9 29 19 23,1 19 20,7 19 19 19 31,2 35 19 28 - 41,3 23,1 38,4 23,1 19 19 19 19 19 27,1 39,3 30

Portugal 65,6 27,5 29,2 34,8 45,6 27,5 27,5 27,5 34,8 27,5 29,2 29,4 29 27,5 34,8 27,5 29,2 27,5 27,5 27,5 45,6 35 27,5 28 27,5 - 34,8 44,9 45,6 27,5 27,5 27,5 27,5 27,5 45,6 45,6 30

Romania 24,4 28,6 21,9 24,4 20,2 24,4 24,4 24,4 24,4 20,2 26,1 22,1 29 20,2 29,4 18,5 26,1 24,4 24,4 20,2 28,6 35 16 28 20,2 39,1 - 36,2 24,4 24,4 20,2 24,4 24,4 24,4 28,6 37 30

Russia 31,6 27,8 33,3 35,4 27,8 27,8 31,6 31,6 35,4 27,8 29,5 29,7 35,4 31,6 27,8 31,6 29,5 35,4 27,8 31,6 35,4 35,4 27,8 31,6 31,6 44,9 35,4 - 27,8 31,6 31,6 27,8 27,8 27,8 31,6 43 31,6

Serbia 14,5 28 20,7 15 14,5 19 24 14,5 28 14,5 16,2 25,4 29 14,5 28 28 20,7 28 28 28 23,5 35 14,5 28 19 34,8 19 31,6 - 14,5 14,5 35 14,5 28 28 32,5 30

Slovak R. 39 19 20,7 19 19 19 24 19 19 19 20,7 20,9 29 19 19 19 20,7 19 19 19 31,2 35 19 28 19 41,3 19 38,4 19 - 19 19 19 19 20 39,3 30

Slovenia 63,8 25 26,7 28,8 28,8 25 25 25 43,8 25 26,7 26,9 29 25 43,8 25 26,7 25 25 25 36,3 35 25 28 25 45,6 28,8 43 28,8 25 - 25 25 25 32,5 68,8 30

Spain 64,8 35 36,7 38,3 44,8 35 35 35 38,3 35 36,7 36,9 35 35 38,3 35 36,7 35 35 35 44,8 35 35 35 35 52,9 41,5 50,6 44,8 35 35 - 35 35 44,8 69,8 35

Sweden 28 28 29,7 28 28 28 28 28 28 28 29,7 29,9 29 28 28 28 29,7 28 28 28 38,8 35 28 28 28 47,8 28 45,3 28 28 28 28 - 28 28 46 30

Switzerl. 25,3 21,3 23 25,3 25,3 21,3 24 21,3 25,3 21,3 23 23,3 29 21,3 25,3 21,3 23 21,3 21,3 21,3 33,1 35 21,3 28 21,3 43 29,2 40,2 48,9 21,3 21,3 21,3 21,3 - 48,9 41 30

Turkey 24 40 33,7 28 28 28 28 32 28 32 33,7 33,9 32 28 28 28 33,7 28 28 28 32 35 28 40 28 42 32 39,2 28 24 28 24 32 28 - 40 32

Ukraine 56,3 28,8 30,4 28,8 28,8 25 28,8 28,8 28,8 28,8 30,5 30,7 29 28,8 36,3 36,3 30,4 28,8 28,8 36,3 36,3 36,3 28,8 28,8 28,8 45,6 32,5 43 28,8 32,5 36,3 36,3 28,8 28,8 32,5 - 30

UK 50 30 31,7 30 30 30 30 30 30 30 31,7 31,9 30 30 30 30 31,7 30 30 30 40,5 35 30 30 30 49,3 30 46,8 30 30 30 30 30 30 30 47,5 -

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Albania - 28 25,7 24 28 28 24 28 28 40,8 25,7 29,9 25 24 28 28 29,7 28 28 28 32 35 20 28 24 41,2 28 39,2 24 28 28 32,5 24 24 24 53 30

Austria 63,8 - 26,7 25 25 25 25 25 28,8 25 26,7 26,9 25 25 43,8 25 26,7 25 25 25 43,8 35 25 28 25 44,9 25 43 43,8 25 25 25 25 25 43,8 43,8 30

Belgium 37,3 34 - 34 37,3 34 34 34 37,3 34 35,7 35,9 34 34 37,3 34 35,6 34 34 34 43,9 35 34 34 34 51,5 34 49,8 40,6 34 34 34 34 34 43,9 50,5 34

Bulgaria 19,3 15 16,7 - 19,3 15 24 15 27,8 15 16,7 16,9 25 15 27,8 15 16,7 15 15 15 27,8 35 15 28 19 37,5 16 35,4 19,3 15 15 15 15 15 23,5 36,3 30

Croatia 20 20 21,7 20 - 20 24 20 20 20 21,7 21,9 25 20 20 20 21,7 20 20 20 32 35 20 28 20 41,2 20 39,2 20 20 20 20 20 20 20 40 30

Cyprus 30 10 11,7 15 10 - 24 10 10 33,4 11,7 11,9 25 10 10 12,5 11,7 10 10 10 23,5 35 10 28 19 33,9 16 31,6 10 10 10 32,5 10 10 28 32,5 30

Czech R. 27,8 24 25,7 24 27,8 24 - 24 27,8 24 25,7 25,9 25 24 27,8 24 25,7 24 24 24 35,4 35 24 28 24 44,1 24 42,2 31,6 24 24 24 24 24 31,6 43 30

Denmark 66 25 26,7 25 28,8 25 25 - 28,8 25 26,7 26,9 25 25 25 25 26,7 25 25 25 36,3 35 25 28 25 44,9 25 43 28,8 25 25 25 25 25 36,3 43,8 30

Estonia 42 22 23,7 22 22 22 24 22 - 22 23,7 23,9 25 22 22 22 23,7 22 22 22 33,7 35 22 28 22 42,7 22 46 22 22 22 22 22 22 22 41,5 30

Finland 66,7 26 27,7 26 29,7 26 26 26 26 - 27,7 27,9 26 26 26 26 27,7 26 26 26 37,1 35 26 28 26 45,6 26 43,8 46,7 26 26 26 26 26 37,1 44,5 30

France 37,7 34,4 36,1 34,4 34,4 34,4 34,4 34,4 37,7 34,4 - 36,4 34,4 34,4 37,7 34,4 36,1 34,4 34,4 34,4 44,3 35 34,4 34,4 34,4 51,8 34,4 50,2 37,7 34,4 34,4 34,4 34,4 34,4 44,3 50,8 34,4

Germany 71,1 38,9 40,6 38,9 42 38,9 38,9 38,9 42 38,9 40,6 - 38,9 38,9 42 38,9 40,6 38,9 38,9 38,9 48,1 38,9 38,9 38,9 38,9 55,1 38,9 53,6 48,1 38,9 38,9 38,9 38,9 38,9 48,1 54,2 38,9

Greece 25 25 26,7 25 25 25 25 25 25 25 26,7 26,9 - 25 25 25 26,7 25 25 25 36,3 35 25 28 25 44,9 25 49 25 25 25 25 25 25 25 43,8 30

Hungary 20 20 21,7 20 20 20 24 20 20 20 21,7 21,9 25 - 20 20 21,7 20 20 20 32 35 20 28 20 41,2 20 39,2 20 20 20 20 20 20 20 40 30

Iceland 50,3 30,3 23,8 30,3 30,3 30,3 24 18 22,1 18 23,8 24 30,3 22,1 - 22,1 32 22,1 22,1 22,1 30,3 35 18 28 22,1 39,7 30,3 37,7 30,3 22,1 30,3 22,1 18 22,1 34,4 55,3 30

Ireland 50 12,5 14,2 15 12,5 12,5 24 12,5 12,5 12,5 14,2 14,4 25 12,5 12,5 - 14,2 12,5 12,5 12,5 30 35 12,5 28 19 35,7 16 33,5 30 12,5 12,5 12,5 12,5 12,5 30 55 30

Italy 39,7 33 34,7 33 39,7 33 33 33 36,4 33 34,7 34,9 33 33 51,1 33 - 33 33 33 43,1 35 33 33 33 50,8 33 49,1 39,7 33 33 33 33 33 43,1 49,8 33

Latvia 43,5 15 16,7 15 19,3 15 24 15 15 15 16,7 16,9 25 15 19,3 15 16,7 - 15 15 27,8 35 15 28 19 37,5 16 47,5 19,3 15 15 15 15 15 23,5 36,3 30

Lithuania 47,8 15 16,7 15 19,3 15 24 15 19,3 15 16,7 16,9 25 15 19,3 15 16,7 15 - 15 27,8 35 15 28 19 37,5 16 35,4 27,8 15 15 15 15 15 23,5 36,3 30

Luxemb. 63,7 29,6 31,3 29,6 43,7 29,6 29,6 29,6 43,7 29,6 31,4 31,6 29,6 29,6 33,1 29,6 31,3 29,6 29,6 - 43,7 35 29,6 29,6 29,6 48,3 29,6 46,5 43,7 29,6 29,6 29,6 29,6 29,6 33,1 68,7 30

Macedonia 23,5 23,5 25,2 19,3 19,3 23,5 24 19,3 23,5 15 16,7 29,7 25 19,3 23,5 23,5 20,9 23,5 23,5 23,5 - 35 27,8 28 19,3 37,5 19,3 35,4 19,3 19,3 19,3 19,3 15 19,3 20 36,3 30

Malta 35 35 36,7 35 35 35 35 35 35 35 36,7 36,9 35 35 35 35 36,7 35 35 35 44,8 - 35 35 35 52,2 35 59 35 35 35 35 35 35 48 60 35

Netherla. 29,2 25,5 27,2 25,5 25,5 25,5 25,5 25,5 29,2 25,5 27,2 27,4 25,5 25,5 25,5 25,5 27,2 25,5 25,5 25,5 36,7 35 - 28 25,5 45,2 25,5 43,4 29,2 25,5 25,5 25,5 25,5 25,5 29,2 44,1 30

Norway 31,6 28 29,7 28 38,8 28 28 28 31,6 28 29,7 29,9 28 28 28 28 29,7 28 28 28 46 35 28 - 28 47,1 28 45,3 46 28 28 28 28 28 42,4 46 30

Poland 23,1 19 20,7 19 23,1 19 24 19 23,1 19 20,7 20,9 25 19 23,1 19 20,7 19 19 19 31,2 35 19 28 - 40,5 19 38,4 34,4 19 19 19 19 19 27,1 39,3 30

Portugal 61,2 26,5 28,2 26,5 41,2 26,5 26,5 26,5 33,9 26,5 28,2 28,4 26,5 26,5 33,9 26,5 28,2 26,5 26,5 26,5 41,2 35 26,5 28 26,5 - 26,5 44,1 41,2 26,5 26,5 26,5 26,5 26,5 30,2 44,9 30

Romania 24,4 16 17,7 24,4 20,2 16 24 16 24,4 16 17,7 17,9 25 16 29,4 16 17,7 16 16 16 28,6 35 16 28 19 38,3 - 36,2 24,4 16 16 16 16 16 28,6 37 30

Russia 31,6 27,8 33,3 35,4 27,8 27,8 31,6 31,6 35,4 27,8 29,5 29,7 35,4 31,6 27,8 31,6 29,5 35,4 27,8 31,6 35,4 35,4 27,8 31,6 31,6 44,1 35,4 - 27,8 31,6 31,6 27,8 27,8 27,8 31,6 43 31,6

Serbia 14,5 28 20,7 15 14,5 19 24 14,5 28 14,5 16,2 25,4 28 14,5 28 28 20,7 14,5 28 28 23,5 35 14,5 28 19 33,9 19 31,6 - 14,5 14,5 32,5 14,5 14,5 28 32,5 30

Slovak R. 39 19 20,7 19 19 19 24 19 19 19 20,7 20,9 25 19 19 19 20,7 19 19 19 31,2 35 19 28 19 40,5 19 38,4 19 - 19 19 19 19 20 39,3 30

Slovenia 54,6 23 24,7 23 26,9 23 24 23 26,9 23 24,7 24,9 25 23 34,6 23 24,7 23 23 23 34,6 35 23 28 23 43,4 23 41,5 26,9 23 - 23 23 23 30,7 59,6 30

Spain 62,6 32,5 34,2 32,5 32,5 32,5 32,5 32,5 35,9 32,5 34,2 34,4 32,5 32,5 35,9 32,5 34,2 32,5 32,5 32,5 42,6 35 32,5 32,5 32,5 50,4 32,5 48,7 42,6 32,5 32,5 - 32,5 32,5 42,6 67,6 32,5

Sweden 28 28 29,7 28 28 28 28 28 28 28 29,7 29,9 28 28 28 28 29,7 28 28 28 38,8 35 28 28 28 47,1 28 45,3 28 28 28 28 - 28 28 46 30

Switzerl. 25,3 21,3 23 21,3 25,3 21,3 24 21,3 25,3 21,3 23 23,3 25 21,3 25,3 21,3 23 21,3 21,3 21,3 33,1 35 21,3 28 21,3 42,2 21,3 40,2 25,3 21,3 21,3 21,3 21,3 - 48,9 41 30

Turkey 24 40 33,7 28 28 28 28 32 28 32 33,7 33,9 32 28 28 28 33,7 28 28 28 32 35 28 40 28 41,2 32 39,2 28 24 28 24 32 28 - 40 32

Ukraine 56,3 28,8 30,4 28,8 28,8 25 28,8 28,8 28,8 28,8 30,5 30,7 28,8 28,8 36,3 36,3 30,4 28,8 28,8 36,3 36,3 36,3 28,8 28,8 28,8 44,9 32,5 43 28,8 32,5 36,3 36,3 28,8 28,8 32,5 - 30

UK 50 30 31,7 30 30 30 30 30 30 30 31,7 31,9 30 30 30 30 31,7 30 30 30 40,5 35 30 30 30 48,6 30 46,8 30 30 30 30 30 30 30 47,5 -

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Note: The above tables provide the effective tax rate by year and country-pair. The effective tax rate was computed considering provisions of tax treaties, specifically regarding non-resident withholding tax rates, double-taxation relief systems, as well as host country´s corporate tax rate. For tax treaties adhering to foreign tax systems other than exemption, the home country´s corporate tax rate is also considered. NA denotes that the country-pair’s specific effective tax rate was not computed for lack of tax information.

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Albania - 19 16,2 14,5 19 19 21 19 19 33,4 16,2 20,5 25 14,5 19 19 20,4 19 19 19 19 35 10 28 19 33,9 19 31,6 14,5 19 19 30 14,5 14,5 20 44 28

Austria 53,8 - 26,7 25 25 25 25 25 28,8 25 26,7 26,5 25 25 43,8 25 26,4 25 25 25 32,5 35 25 28 25 44,9 25 43 43,8 25 25 25 25 25 43,8 43,8 28

Belgium 37,3 34 - 34 37,3 34 34 34 37,3 34 35,7 35,5 34 34 37,3 34 35,4 34 34 34 40,6 35 34 34 34 51,5 34 49,8 40,6 34 34 34 34 34 43,9 50,5 34

Bulgaria 14,5 10 11,7 - 14,5 10 21 10 19 10 11,7 11,5 25 10 19 12,5 11,4 10 10 10 19 35 10 28 19 33,9 16 31,6 14,5 10 10 10 10 10 20 32,5 28

Croatia 20 20 21,7 20 - 20 21 20 20 20 21,7 21,5 25 20 20 20 21,4 20 20 20 28 35 20 28 20 41,2 20 39,2 20 20 20 20 20 20 20 40 28

Cyprus 20 10 11,7 10 10 - 21 10 10 33,4 11,7 11,5 25 10 10 12,5 11,4 10 10 10 19 35 10 28 19 33,9 16 31,6 10 10 10 30 10 10 28 32,5 28

Czech R. 25 21 22,7 21 25 21 - 21 25 21 22,7 22,5 25 21 25 21 22,4 21 21 21 28,9 35 21 28 21 41,9 21 40 28,9 21 21 21 21 21 28,9 40,8 28

Denmark 56 25 26,7 25 28,8 25 25 - 28,8 25 26,7 26,5 25 25 25 25 26,4 25 25 25 32,5 35 25 28 25 44,9 25 43 28,8 25 25 25 25 25 36,3 43,8 28

Estonia 31 21 22,7 21 21 21 21 21 - 21 22,7 22,5 25 21 21 21 22,4 21 21 21 28,9 35 21 28 21 41,9 21 45 21 21 21 21 21 21 21 40,8 28

Finland 56,7 26 27,7 26 29,7 26 26 26 26 - 27,7 27,5 26 26 26 26 27,4 26 26 26 33,4 35 26 28 26 45,6 26 43,8 46,7 26 26 26 26 26 37,1 44,5 28

France 37,7 34,4 36,1 34,4 34,4 34,4 34,4 34,4 37,7 34,4 - 35,9 34,4 34,4 37,7 34,4 35,8 34,4 34,4 34,4 41 35 34,4 34,4 34,4 51,8 34,4 50,2 37,7 34,4 34,4 34,4 34,4 34,4 44,3 50,8 34,4

Germany 54,1 30,2 31,9 30,2 33,7 30,2 30,2 30,2 33,7 30,2 31,9 - 30,2 30,2 33,7 30,2 31,6 30,2 30,2 30,2 40,7 35 30,2 30,2 30,2 48,7 30,2 46,9 40,7 30,2 30,2 30,2 30,2 30,2 40,7 47,6 30,2

Greece 25 25 26,7 25 25 25 25 25 25 25 26,7 26,5 - 25 25 25 26,4 25 25 25 32,5 35 25 28 25 44,9 25 43 25 25 25 25 25 25 25 43,8 28

Hungary 20 20 21,7 20 20 20 21 20 20 20 21,7 21,5 25 - 20 20 21,4 20 20 20 28 35 20 28 20 41,2 20 39,2 20 20 20 20 20 20 20 40 28

Iceland 37,8 27,8 20,9 27,8 27,8 27,8 21 15 19,3 15 21 20,8 27,8 19,3 - 19,3 29,1 19,3 19,3 19,3 27,8 35 15 28 19,3 37,5 27,8 35,4 27,8 19,3 27,8 19,3 15 19,3 32 52,8 28

Ireland 40 12,5 14,2 12,5 12,5 12,5 21 12,5 12,5 12,5 14,2 14 25 12,5 12,5 - 13,9 12,5 12,5 12,5 30 35 12,5 28 19 35,7 16 33,5 30 12,5 12,5 12,5 12,5 12,5 30 55 28

Italy 34,8 27,5 29,2 27,5 34,8 27,5 27,5 27,5 31,1 27,5 29,2 29 27,5 27,5 47,1 27,5 - 27,5 27,5 27,5 34,8 35 27,5 28 27,5 46,7 27,5 44,9 34,8 27,5 27,5 27,5 27,5 27,5 38,4 45,6 28

Latvia 33,5 15 16,7 15 19,3 15 21 15 15 15 16,7 16,5 25 15 19,3 15 16,4 - 15 15 23,5 35 15 28 19 37,5 16 47,5 19,3 15 15 15 15 15 23,5 36,3 28

Lithuania 37,8 15 16,7 15 19,3 15 21 15 19,3 15 16,7 16,5 25 15 19,3 15 16,4 15 - 15 27,8 35 15 28 19 37,5 16 35,4 27,8 15 15 15 15 15 23,5 36,3 28

Luxemb. 50,2 29,6 31,3 29,6 40,2 29,6 29,6 29,6 33,1 29,6 31,4 31,1 29,6 29,6 33,1 29,6 31 29,6 29,6 - 40,2 35 29,6 29,6 29,6 48,3 29,6 46,5 40,2 29,6 29,6 29,6 29,6 29,6 33,1 65,2 29,6

Macedonia 19 10 20,7 14,5 14,5 19 21 14,5 19 10 11,7 25 25 14,5 19 19 15,9 14,5 19 19 - 35 23,5 28 19 33,9 16 31,6 14,5 14,5 14,5 14,5 10 14,5 20 32,5 28

Malta 35 35 36,7 35 35 35 35 35 35 35 36,7 36,5 35 35 35 35 36,4 35 35 35 41,5 - 35 35 35 52,2 35 59 35 35 35 35 35 35 48 60 35

Netherla. 29,2 25,5 27,2 25,5 25,5 25,5 25,5 25,5 29,2 25,5 27,2 27 25,5 25,5 25,5 25,5 26,9 25,5 25,5 25,5 33 35 - 28 25,5 45,2 25,5 43,4 29,2 25,5 25,5 25,5 25,5 25,5 29,2 44,1 28

Norway 31,6 28 29,7 28 38,8 28 28 28 31,6 28 29,7 29,5 28 28 28 28 29,4 28 28 28 46 35 28 - 28 47,1 28 45,3 46 28 28 28 28 28 42,4 46 28

Poland 23,1 19 20,7 19 23,1 19 21 19 23,1 19 20,7 20,5 25 19 23,1 19 20,4 19 19 19 27,1 35 19 28 - 40,5 19 38,4 34,4 19 19 19 19 19 27,1 39,3 28

Portugal 51,2 26,5 28,2 26,5 41,2 26,5 26,5 26,5 33,9 26,5 28,2 28 26,5 26,5 33,9 26,5 27,9 26,5 26,5 26,5 41,2 35 26,5 28 26,5 - 26,5 44,1 41,2 26,5 26,5 26,5 26,5 26,5 30,2 44,9 28

Romania 24,4 16 17,7 24,4 20,2 16 21 16 24,4 16 17,7 17,5 25 16 29,4 16 17,4 16 16 16 24,4 35 16 28 19 38,3 - 36,2 24,4 16 16 16 16 16 28,6 37 28

Russia 31,6 27,8 33,3 35,4 27,8 27,8 31,6 31,6 35,4 27,8 29,5 29,3 27,8 31,6 27,8 31,6 29,2 35,4 27,8 31,6 31,6 35,4 27,8 31,6 31,6 44,1 35,4 - 27,8 31,6 31,6 27,8 27,8 27,8 31,6 43 31,6

Serbia 14,5 28 20,7 14,5 14,5 19 21 14,5 28 14,5 16,2 25 28 14,5 28 28 20,4 14,5 28 28 19 35 14,5 28 19 33,9 19 31,6 - 14,5 14,5 30 14,5 14,5 20 32,5 28

Slovak R. 29 19 20,7 19 19 19 21 19 19 19 20,7 20,5 25 19 19 19 20,4 19 19 19 27,1 35 19 28 19 40,5 19 38,4 19 - 19 19 19 19 20 39,3 28

Slovenia 43,7 22 23,7 22 25,9 22 22 22 25,9 22 23,7 23,5 25 22 33,7 22 23,4 22 22 22 29,8 35 22 28 22 42,7 22 40,7 25,9 22 - 22 22 22 29,8 41,5 28

Spain 52,6 30 31,7 30 30 30 30 30 33,5 30 31,7 31,5 30 30 33,5 30 31,4 30 30 30 37 35 30 30 30 48,6 30 46,8 42,6 30 30 - 30 30 40,5 47,5 30

Sweden 28 28 29,7 28 28 28 28 28 28 28 29,7 29,5 28 28 28 28 29,4 28 28 28 35,2 35 28 28 28 47,1 28 45,3 28 28 28 28 - 28 28 46 28

Switzerl. 25,1 21,2 22,9 21,2 25,1 21,2 21,2 21,2 25,1 21,2 22,9 22,7 25 21,2 25,1 21,2 22,5 21,2 21,2 21,2 29,1 35 21,2 28 21,2 42,1 21,2 40,1 25,1 21,2 21,2 21,2 21,2 - 48,8 40,9 28

Turkey 24 40 33,7 28 28 32 28 32 28 32 33,7 33,5 32 28 32 32 33,4 28 28 28 28 35 28 40 28 41,2 32 39,2 24 24 28 24 32 32 - 40 32

Ukraine 46,3 28,8 30,4 28,8 28,8 25 28,8 28,8 28,8 28,8 30,5 30,3 28,8 28,8 36,3 36,3 30,1 28,8 28,8 36,3 32,5 36,3 28,8 28,8 28,8 44,9 32,5 43 28,8 32,5 28,8 36,3 28,8 28,8 32,5 - 28,8

UK 38 28 29,7 28 28 28 28 28 28 28 29,7 29,5 28 28 28 28 29,4 28 28 28 35,2 35 28 28 28 47,1 28 45,3 28 28 28 28 28 28 28 46 -

Home:

Host:

67

Appendix D: Estimates on the effect of tax treaties on the number of new foreign subsidiaries: All variabl es lagged by one year

Note: The estimation uses the fixed effects negative binomial. All regressions include country-pair fixed effects. Standard errors are in parentheses. The marginal effects are evaluated at the sample means of the regressors. The bottom of the table indicates the number of country-pairs observations and respective groups. ***, **, * indicate statistical significance at the 1, 5 and 10% level.

Variables (1) (2) (3) (4)

0.231** 0.274** 0.206*(0.112) (0.116) (0.113)

-1.189*** -1.108***(0.229) (0.234)

-2.058*** -2.141***(0.281) (0.287)

0.518(0.363)

3.811*** 3.802*** 3.631*** 3.634***(0.306) (0.307) (0.313) (0.314)0.0772* 0.0877** 0.124*** 0.122***(0.041) (0.042) (0.041) (0.041)0.304 0.340 0.147 0.113

(0.396) (0.396) (0.403) (0.404)-0.005* -0.005* -0.008** -0.008***(0.003) (0.003) (0.003) (0.003)0.582*** 0.603*** 0.577*** 0.570***(0.111) (0.112) (0.109) (0.109)

-3.444*** -3.680*** -3.187*** -3.315***(1.137) (1.149) (1.121) (1.124)

Marginal effects

Treaty 1.650** 1.967** 1.356*hostCTR -14.681*** -15.394***WTR 3.724ETR -8.025*** -7.311***

Number of observations 7,173 7,173 7,173 7,173Groups 797 797 797 797

PROD

Constant

Treaty

hostCTR

WTR

ETR

GDP

EU

INFL

ULC

69

Acknowledgements

The author’s gratefully acknowledge Alfons Weichenrieder (Editor of

FinanzArchiv/Public Finance Analysis) and two anonymous referees for their

valuable inputs on earlier versions of this essay. Also, I am indebted to Paulo

Guimarães for providing the Fenbtest algorithm and for his helpful comments

and suggestions.

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Essay 2

The Tax Responsiveness of Investment

under Increasing Opportunities for Profit

Shifting. An Empirical Analysis

75

2.1 Introduction

Firms’ tax responsiveness may be reflected in different decisions, for example,

financial decisions or real decisions. The former involve shifting profits out of

higher-tax countries through transfer pricing and financial structures; the latter

consist of decisions regarding the location of economic activity, assets and

employment.

There is a broad body of literature devoted to analysing the impact of

corporate taxation on real investment decisions that suggests negative effects

of taxation on the optimal level of investment (for surveys of the empirical

literature, see De Mooij and Ederveen, 2003, 2006; Devereux, 2006a; Feld and

Heckemeyer, 2011). Similarly, discussions of cross-border profit shifting show

widespread consensus that international taxation incentives lead multi-country

companies to shift their profits from higher- to lower-tax locations. Profit-shifting

strategies are undertaken because multinational companies are not taxed as a

single corporate group: the tax base is determined separately for each

subsidiary. For instance, Clausing (2009) estimates that tax-motivated income

shifting results in 35 per cent lower corporate income tax revenues in the U.S.

While tax policies have been implemented in the U.S. to discourage and limit

international tax avoidance (e.g. the 2012 Budget), in the EU a new tax system

model, consisting of a set of common rules for determining the tax base, has

been proposed by the European Commission and has been evaluated and

discussed in the academic literature (see e.g. Devereux and Loretz, 2008;

Fuest, 2008).

There is, however, limited literature evaluating the relation between the tax

responsiveness of real investment and cross-border profit-shifting activities,

although the theoretical literature suggests that the two decisions are to some

extent ‘mutually exclusive’ in the sense that when financial decisions are taken

to avoid taxation, real investment decisions become less responsive to taxation.

The analysis of the relation between the real investment response to

taxation and profit shifting allows an understanding of how business taxation

76

affects firms’ behaviour from a broader and more articulated perspective. In

particular, the assessment of such a relationship has implications for tax system

design as it clarifies whether or not there is a trade-off between real and

financial responses to corporate taxation. Furthermore, this research is relevant

to the current discussion of the European Commission’s CCCTB directive

proposal. The proposal is designed to eliminate intra-company transactions

within multinational groups, which will make the current profit-shifting strategies

obsolete. This study sheds light on the consequences of such a design for the

expected additional distortions of corporate taxation on real investment.

In the past decade, there have been several important changes in the EU

that have increased the opportunities for profit shifting and facilitated real

investment across countries, such as the common system of taxation applicable

to royalty and interest payments and the expansion of the EU to include Central

and Eastern European countries. In this context of greater opportunities to shift

paper profits, as well as the higher transnational mobility of capital, the aim is to

analyse the relation between foreign real investment responsiveness to the host

country’s corporate taxation and cross-border profit-shifting activities.

Theoretically, shifting profits out of higher-tax countries lowers the cost of

capital, leading to an increase in the optimal level of real investment (e.g. Mintz

and Smart, 2004; Egger et al., 2012). Therefore, it is hypothesized that the tax

responsiveness of foreign real investment is inversely related to cross-border

profit-shifting activities.

The hypothesis is assessed using companies’ heterogeneous ability and

incentives for profit-shifting activities. More precisely, the tax sensitivity of real

investment is evaluated for subsamples of multinational companies differing in

their ability to shift profits out of higher-tax countries and in their incentives to

engage in these activities. The rationale is that ‘shifter’ companies should be

less tax responsive regarding real investment when compared with ‘non-shifter’

companies.

The empirical analysis is based on a sample of 20,130 European foreign

subsidiaries throughout the period 2001-2009 and relies on a fixed-effects

model that enables the researcher to control for observed and unobserved time-

constant heterogeneity as well as shocks over time.

77

The remainder of the essay is organized as follows. Section 2.2 provides

an overview of the CCCTB directive proposal. Section 2.3 outlines a brief

literature review, discusses institutional and legal changes in the EU throughout

the last decade and states the hypothesis. Section 2.4 describes the data and

empirical strategy in detail. Section 2.5 provides the empirical results and

Section 6 concludes.

2.2 The common consolidated corporate tax base

The main motivation for this essay stems from the directive proposal by the

European Commission for a common corporate tax system. This section briefly

describes the content and main features of the directive proposal.

The first step towards this proposal was made with a mandate by the

European Council, which asked the European Commission for a study on

business taxation in the EU. The report ‘Company Taxation in the Internal

Market’ was published in 2001 (see European Commission, 2001). With

contributions from two panels of experts (one mainly from businesses and the

other from academia), the study provides information on effective tax rates

across the EU countries as well as identifying tax obstacles to cross-border

economic activities within the EU. The working group was also asked to present

solutions, hence the report makes several proposals for a tax reform, following

two different approaches: (i) targeted solutions that intend to remedy the

identified obstacles; (ii) comprehensive solutions that aim to remedy the

underlying causes of the obstacles (see e.g. Devereux, 2004 for a more

detailed discussion). Within the identified comprehensive solutions, the study

proposes four alternative ways to implement a common system to tax

multijurisdictional European companies. However, the debate has focused on

the project consisting of providing the European multinational companies with a

common tax base for their EU-wide activities. The debate and discussion on

this solution started since then and culminated with the CCCTB directive

proposal in 2011.

78

The CCCTB relies on a common set of tax rules for the computation of the

EU-wide tax base of companies operating within the EU. This new tax system

establishes the consolidation of taxable profits at the corporate group level,

which means that, using the same set of tax rules, corporate groups shall

calculate their overall tax income in all the countries where they have

operations. Hence, the proposal implies the remedy for an identified obstacle in

the European Commission’s report - cross-border loss compensation. The tax

base is then apportioned to the member states based on a sharing mechanism

(called the apportionment formula). Finally, each group member is taxed in the

country where it is located according to the respective country’s corporate tax

rate, which remains at the sovereignty of each member state.

The suggested formula for apportioning the consolidated tax base

comprises three indicator factors: labour, assets and sales. Labour is computed

according to the payroll and the number of employees and the asset factor

consists of tangible assets. According to the directive proposal, a company is

eligible if the requirements regarding control (more than 50 per cent) and

ownership (more than 75 per cent equity) are met. Therefore, the consolidated

tax base (CTB) is apportioned, for instance, to the group member A according

to the following formula for apportionment:

�ℎ,�+_ = `13a��+��_

a��+��b�� +13`12

2,-�&cc_2,-�&ccb�� +

12

8/*dc&-++�_8/*dc&-++�b��e +

13

f,c+�_f,c+�b��e ∗ '(g (1)

In sum, the directive aims to replace the current separate accounting

system with a ‘two-step consolidation and apportionment procedure’ (Devereux

and Loretz, 2008, p. 1).

Choosing the mentioned indicators to be incorporated into the

apportionment formula is intended to proxy for the economic activity. On one

hand, there is an option for source-based taxation as the EU-wide tax base of a

multinational is partly apportioned based on the input factors (labour and

assets). On the other hand, the formula relies on sales, which guarantee

destination-based taxation to a certain extent. The destination-based taxation

eliminates the distortions of location arising from tax differences across

European countries (Devereux, 2004).

79

During the conceptual work on introducing the CCCTB, there was a

discussion around the need for mandatory adoption of the International

Accounting Standards and International Financial Reporting Standards for

companies reporting tax-relevant information under the same set of accounting

rules (Fuest, 2008). However, the adopted solution comprises only the

computation of the tax base without interference with financial accounts. Thus,

‘member states will maintain their national rules on financial accounting and the

CCCTB system will introduce autonomous rules for computing the tax base of

companies’ (European Commission, 2011, p. 5).

A feature of the CCCTB proposal is that in calculating the tax base, the

profits and losses from transactions directly carried out between group

members will be eliminated. This means that the current channels for profit

shifting (e.g. transfer pricing, internal debt, shared costs and overheads) would

become obsolete. The purpose of eliminating the commonly used international

tax-planning strategies, and particularly the cross-border profit-shifting activities

within the EU, is fully achieved with this proposal. Moreover, the current

disputes between national tax authorities and between companies and tax

authorities regarding transfer pricing would be significantly reduced with this

new regime.

An emerging question with the introduction of this EU tax system concerns

whether the elimination of international profit-shifting activities will create new

ways of tax planning with implications for instance for the location decisions of

foreign investment. Although the proposal excludes the possibility of tax

planning through the relocation of highly mobile assets (e.g. intangible assets),

if governments react strongly by competing through tax rate cuts, the relocation

of production can be very advantageous from the tax savings perspective and

hence resource allocation efficiency does not seem to be assured.

Although there has been research analysing countries losing/winning tax

revenues with the introduction of this new tax system (see e.g. Fuest et al.,

2007; Devereux and Loretz, 2008), no empirical literature has examined the

extent to which the elimination of profit shifting will create additional tax

distortions in foreign real investment.

80

2.3 Background and hypothesis development

This section provides a brief review of the literature examining the relation

between the tax responsiveness of real investment and international profit

shifting and develops the hypothesis to be tested.

2.3.1 Relation between profit shifting and real inv estment

Typically, multinational companies play the tax game through investment

location decisions and profit relocation. For instance, Hines (1999) surveys the

previous literature and concludes that international taxation has a significant

impact on both foreign investment and profit-shifting activities.

A wide consensus exists that the host country’s corporate tax rate is

capable of having a negative effect on the volume of foreign investment. The

reason is that the host country’s tax rate leads to a higher cost of capital and

consequently to a negative impact on the optimal level of investment. De Mooij

and Ederveen (2006), in their meta-analysis, find that the literature reports tax

semi-elasticities with a median value of -2.9 on average. This means that a 1

percentage point decrease in the host country’s corporate tax rate raises the

volume of investment in that country by 2.9 per cent.

Similarly, tax rate differences create incentives for tax planning,

specifically profit-shifting activities. For instance, Huizinga and Laeven (2008)

use a cross-sectional European sample and a tax measure that captures

incentives for profit shifting. They indirectly confirm the existence of profit-

shifting activities from parent companies to foreign subsidiaries. They also find

significant profit shifting between subsidiaries. Literature analysing the

European context has already pointed out different channels through which

profit shifting is carried out, such as financial structures (Ramb and

Weichenrieder, 2005; Huizinga et al., 2008) and the location of intangible assets

(e.g. Dischinger and Riedel, 2011; Becker and Riedel, 2012).

There is, however, little literature directly devoted to examining the relation

between real investment decisions and profit-shifting activities. The theoretical

81

literature points out that cross-border profit shifting tends to make real

investment less responsive to corporate taxation (see e.g. Mintz and Smart,

2004; Stowhase, 2005; Hong and Smart, 2010; Egger et al., 2012). The reason

is that the cost of capital decreases as taxable profits are shifted towards lower-

tax locations, which increases the attractiveness of a given location regarding

the real investment. The decrease in the cost of capital - and consequently in

the respective effective tax rate - implies that the relocation of real investment

from higher- to lower-tax countries is partly substituted by profit mobility

(Stowhase, 2005).

Some of the empirical research examining the relation between the

volume of investment and international profit shifting finds that some

multinational firms invest in lower-tax countries to hold intangible assets there.

Doing so allows multinational companies to book the associated income in a

lower-tax location (e.g. Grubert and Slemrod, 1998; Grubert, 2003; Dischinger

and Riedel, 2011).

Furthermore, Grubert (2003) finds that companies in both very high-tax

and very low-tax countries displays a much greater number of related-party

transactions. It is also argued that multinational companies with a greater ability

to shift their income from higher-tax to lower-tax countries invest more in the

latter countries in order to provide evidence of acceptable financial ratios and

thus minimize the probability of being audited and penalized by tax authorities

(e.g. Azémar and Corcos, 2009).

The common denominator of the above studies is that decisions regarding

investment and profit locations involve either a tax haven or a developing

country on the one hand and a very well-developed country (e.g. the US or

Japan) on the other. As tax-planning flows in these cases consist of shifting

income out of the developed countries, firms are expected to face higher

regulatory costs as these countries tend to be highly active in enforcing transfer

pricing and other anti-avoidance rules (see e.g. Klassen and Laplante, 2013 for

further discussion on income-shifting costs). This should at least partially justify

why in these studies the authors generally find that profit shifting to lower-tax

countries is followed by a higher amount of investment there.

82

In a different context from that of previous studies, Overesch (2009)

examines the extent to which the level of real investment in a high-tax country is

associated with incentives to shift income. In his research, the foreign

subsidiaries are no longer located in lower-tax countries but in one of Europe’s

higher-tax locations (Germany) and are owned by multinational firms from

various lower-tax countries. The results obtained indicate a positive effect of tax

rate differentials between Germany and the home countries and the size of

investment in Germany. Overesch (2009) suggests that as profit-shifting

activities enable multinationals to shift their income out of Germany, the volume

of investment is found to increase. These results are in line with Mintz and

Smart’s (2004) theoretical proposition, which states that investment in higher-

tax countries is greater when income shifting is allowed.

Overesch (2009) sheds some light on the relation between the tax

responsiveness of real investment and profit-shifting activities. For a broad

sample of European firms, the present essay focuses on the analysis of real

investment sensitivity arising from different abilities and incentives for profit

shifting. Furthermore, extending the analysis to comprise host countries that

have different corporate taxation levels in force and to encompass a period of

increasing opportunities to engage in income shifting is potentially instructive in

relation to the possible trade-off between the tax responsiveness of foreign

investment and cross-border profit shifting.

2.3.2 Real investment and profit location in the Eu ropean

context

Over the past decade, there have been several changes within the EU that

have had impacts on real investment as well as on profit-shifting opportunities.

First, the accession to the EU of Central and Eastern European countries has

increased the size of the common market significantly, which has potentially led

to an increase in foreign investment. Also, the enlargement has implied a boost

in the capital mobility between European countries (Finkenzeller and Spengel,

2004). The increasing capital mobility has also exerted some downward

pressure on corporate tax rates (Devereux, 2006b). From 2004 to 2009, the

83

STR within the older member states dropped on average by more than four

percentage points. Devereux (2006b, p. 14) notes that the ‘co-movements in the

statutory tax rate reflect competition for profits’. It follows from the above that

although the EU market enlargement has led to an increase in foreign

investment, the decrease in corporate tax rates across European countries is

likely to trigger more profit-shifting activities.

Second, the new rules on the taxation of cross-border interest and royalty

payments became effective in 2004. Under this directive, if the recipient is an

associated company or a permanent establishment in another member state,

the interest and royalty payments are exempt from non-resident withholding tax

rates. The directive is likely to induce profit-shifting practices as the cross-

border flows of income can be made at more reduced costs since then. With the

implementation of the directive, there are greater incentives for debt shifting in

order to book interest income in lower-tax countries and also for tax-oriented

agreements on royalty payments. As a result, it is likely that the implementation

of the directive has led to the substitution of the relocation of real investment by

profit-shifting strategies.

Finally, throughout the sample period, there was a downward trend in the

corporate income tax rates in the European Union area. In 2004, the STR within

the older member states was 31.2 per cent on average and in the new member

states it was 21.5 per cent on average. The fall of about 3.5 percentage points

in the corporate tax rate of the EU area from 2004 to 2009 reflects the declining

tendency seen throughout the decade. This has implications for the cost of

capital and consequently for the optimal level of investment; however, to

observe these effects, the downward trend would have to be homogeneous.

To summarize, the expansion of the EU had positive impacts on real

investment, while the introduction of the EU directive on interest and royalty

payments is likely to reduce the need for the relocation of real investment for tax

purposes as a result of increased opportunities for profit shifting. As far as the

declining trend in the level of corporate taxation is concerned, it is difficult to

predict its implications for real investment.

84

It should be noted that the above-mentioned institutional and fiscal

alterations in Europe are not predicted to have created or changed the inverse

relationship that is intended to be examined, but they rather constitute a natural

changing context with potential effects on both profit shifting and real

investment.

Theoretically, the tax responsiveness of investment is lower when firms

are able to shift their profits from higher-tax to lower-tax countries (e.g. Egger et

al., 2012). To put it another way, if a multinational company could not shift its

profits out of a higher-tax location and since the profits earned would be taxed

there, a higher tax sensitivity of real investment would be expected. In such a

scenario, the required rate of return would increase as the host country’s

corporate tax rate increased, leading to a decrease in the volume of real

investment. Instead, under the profit-shifting scenario, the optimal level of

investment would tend to be unrelated to the level of corporate taxation as the

income could be shifted towards a low-tax country (see e.g. Egger et al., 2012).

In such a context, the size of the investment should be affected less by the host

country’s corporate tax rate. From the above, the hypothesis is as follows:

The tax responsiveness of foreign real investment is inversely

associated with cross-border profit-shifting activities.

In order to examine the hypothesis, it is necessary to identify, in an

international setting, companies that are able to shift their profits (‘profit

shifters’) and companies that are not (‘non-shifters’). Making such a distinction

directly is not possible as profit-shifting activities are not observed. Most

empirical literature on profit shifting assesses these activities indirectly through

examining the rates of profit, financial policies and debt-to-equity ratios (see e.g.

Devereux, 2006a). There are also studies evaluating and comparing directly the

transfer prices between independent and related parties. However, this strategy

cannot be used because of the lack of databases containing such detailed

information. Furthermore, these studies find that the prices from related-party

transactions are more tax-oriented when compared with those established

between independent companies, leading to the identification of ‘shifting

transactions’ rather than ‘shifting companies’.

85

Consequently, the adopted identification strategy relies on the use of firm-

specific as well as country-specific features that are associated with

greater/lesser ability and greater/fewer incentives to shift profits. Once the

sample is partitioned according to ability or incentives for profit shifting, the

extent to which the tax responsiveness of real investment varies between

subsamples of foreign subsidiaries is estimated.

Firms’ ability to shift their profits out of higher-tax countries is

heterogeneous. Companies with higher intangible assets generate more

transactions using patents, copyrights and trademarks. These operations trigger

royalty payments and then companies with higher intangible assets are more

able to shift their income across countries as a consequence of tax-oriented

agreements on royalty fees. Hence, according to the stated hypothesis, the

investment response to the host country’s corporate tax rate is expected to be

lower for foreign subsidiaries with a greater ability to shift their income

compared with those with a lower ability to engage in these activities.

In addition to differences in the ability, multinational companies have

heterogeneous incentives to shift paper profits. The tax rate differential between

host and home countries has an impact on the extent to which companies

engage in cross-border profit shifting. For instance, if the tax rate differential is

large, the gains arising from shifting profits are more likely to compensate for

the imposed tax-planning costs when compared with those obtained when the

tax difference is residual. Therefore, corporate groups with larger tax rate

differentials are expected to evidence less real investment responsiveness to

taxation as a result of higher levels of profit-shifting activity compared with those

groups with fewer incentives to shift paper profits out of higher-tax countries.

86

2.4 Empirical analysis

The examination of the hypothesis demands for an international context,

particularly for multijurisdictional companies. The following subsections describe

the dataset used and provide the descriptive statistics. The empirical approach

is also identified and discussed.

2.4.1 The data

The data are from Bureau van Dijk’s Amadeus database. This comprehensive

database provides accounting and financial information from more than 19

million European companies. Excluded from the analysis are all financial,

insurance and holding companies as the financial accounting in these sectors is

prepared differently.

The observation units are European foreign subsidiaries for the period

2001-2009. The relationship to be investigated is reflected more clearly in

controlled subsidiaries in which the shareholders’ competing interests are

mitigated. Hence, a subsidiary is considered as such if held by a European

multinational owning at least 50 per cent of the subsidiary’s capital. A foreign

subsidiary is selected if it provides information on its fixed assets and sales and

is located in both EU and non-EU countries. Later, the sample is restricted to

only those located in and owned by parent companies residing in the EU.

There are parent companies that own more than one establishment in the

same host country. As the main incentives for profit shifting will be identical

within each host country (e.g. the tax rate differential), foreign subsidiaries are

aggregated at the country level when there is more than one subsidiary located

in the same country controlled by the same parent company. Even though

subsidiaries located in the same host country have similar incentives, there

might be different opportunities for profit shifting (e.g. the volume of operations

and ownership structure). Therefore, in the baseline results, estimates using a

disaggregated sample and data are also provided as a specification check.

Table 2.1 displays the number of subsidiaries by both host and home countries.

87

Table 2.1

Distribution of Foreign Subsidiaries

Note: The table displays the host country distribution of the sample foreign subsidiaries and the location of the corresponding parent companies. Source: Amadeus database.

by host country by home countryAustria 608 915

Belgium 851 954

Bulgaria 226 0

Croatia 336 15

Cyprus 0 68

Czech Republic 1,834 46

Denmark 354 1,063

Estonia 344 8

Finland 631 710

France 1,617 2,502

Germany 1,252 3,856

Greece 0 53

Hungary 495 27

Iceland 5 14

Ireland 167 123

Italy 1,506 1,440

Latvia 15 8

Lithuania 0 6

Luxembourg 125 356

Malta 5 1

Netherlands 324 2,214

Norway 786 330

Poland 2,137 55

Portugal 471 53

Romania 1,253 0

Russia 0 16

Slovak Republic 503 18

Slovenia 225 65

Spain 1,780 560

Sweden 798 1,482

Switzerland 11 2,005

Turkey 0 13

United Kingdom 1,471 1,154

Total 20,130 20,130

CountryNumber of subsidiaries

88

The aim of the essay is to analyse whether the tax responsiveness of real

investment is negatively associated with cross-border income-shifting activities

throughout 2001 to 2009. Financial information from unconsolidated accounts is

used, which enables to address directly both the tax-induced investment and

the profit-shifting activities of foreign subsidiaries.

The Amadeus database reports information on the ownership structure

only for the last reported year. The ownership structure used is from 2009,

which might lead to some misclassifications of parent-subsidiary linkage, if the

ownership has changed over the period under study. As pointed out by

Dischinger and Riedel (2011), these misclassifications are not a serious

problem as the noise introduced in the estimations should bias the results

towards zero.

Table 2.2 provides descriptive statistics for the sample of foreign

subsidiaries located in both EU and non-EU countries.

Table 2.2


Note: Descriptive statistics of the sample foreign subsidiaries. The variables fixed assets, number of employees, intangible assets, sales, GDP and GDPpc are log transformed.

The empirical analysis relies on 122,908 firm-years for the entire sample

period, corresponding to 20,130 foreign subsidiaries owned by 6,791

Variables Obs Mean Std. Dev. Min Max

Fixed assets 122,908 6.951 2.863 0 18.255

Number of employees 107,363 3.949 1.889 0 11.540

Statutory tax rate 122,908 0.282 0.065 0.1 0.402

Statutory tax rate difference 122,908 -0.026 0.079 -0.264 0.289

Weighted average tax difference 122,908 -0.031 0.056 -0.255 0.307

Intangible assets 115,480 4.445 2.806 0 15.784

Intangible assets intensity 115.416 0.453 0.498 0 1

TaxDiff (STR) 122,908 0.528 0.499 0 1

TaxDiff (Weigthed average) 55,896 0.402 0.490 0 1

Sales 122,908 9.395 2.024 0 19.375

GDP 122,908 12.831 1.352 8.533 14.721

GDP pc 122,908 9.930 0.395 8.613 11.135ULC 122,908 3.474 0.660 1.276 4.939

89

multinational companies. This means that each subsidiary is observed for 6.1

years on average.

The mean of the host country’s STR is approximately 28.2 per cent,

although it ranges between 10 and 40.2 per cent. The STR differential between

host and home countries is -2.6 per cent, accounting for 52.8 per cent of the

sample firms labelled as having a high tax difference ((,h1^GG). When the tax

difference is computed using the approach by Huizinga and Laeven (2008), the

weighted average tax difference is -3.1 per cent. Regarding the intensity of

intangible assets, 45.3 per cent of the sample firms were labelled as being

highly intangible-intensive. The next section presents the empirical approach

taken and a definition of the variables used.

2.4.2 Empirical strategy

The estimation is based on a model with the following general specification:

ln 9a=" = Fi Fjf()=" Fk(f()="x7a_7:�+:�^�-=") ∁>=" n= o" p=" (2)

with 9a indicating the fixed assets owned by subsidiary ^ at time �. Following

the previous literature and since the distribution of fixed assets is skewed, the

logarithmic transformation of fixed assets is used. The subsidiary’s employment

figure is taken as an alternative proxy for real investment (see the following

section for further discussion).

The independent variable of interest is the statutory tax rate applicable in

the ith subsidiary’s country at year � - f()=". The reason for using the host

country’s STR instead of the tax rate difference, as in Overesch (2009), is that it

is intended to capture the tax effects on real investment rather than to establish

the effects of taxation on both financial and real decisions. These data consist

of the combined central and local STR on distributed profits and come from the

OECD tax database and Ernst & Young’s and KPMG’s corporate tax guides.

Table 2.3 displays the STR for all the host countries over the sample period.

The lower-tax host countries are attractive locations to undertake

economic activity, leading to higher real investment levels. Hence, the

coefficient of the f() is predicted to be negative.

90

Table 2.3

Host Countries’ Corporate Tax Rates

Note: Combined (central and local) statutory corporate income tax rates. When more than one rate level exists in the central tax rate, the highest level is taken. Source: OECD tax database and Ernst & Young’s and KPMG’s corporate tax guides.

The relation between real investment responses to taxation and profit-

shifting activities may be assessed effectively by comparing the corporate

taxation effects on real investment for subsamples of firms that differ in their

ability or incentives to shift paper profits from higher- to lower-tax countries.

There is empirical evidence to support the idea that intangible assets and the

respective royalty flows are common channels for profit shifting (e.g. Harris et

al., 1993; Azémar and Corcos, 2009). Therefore, the sample is split according

to whether or not the foreign subsidiary is intensive in intangible assets

Austria 34 34 34 34 25 25 25 25 25

Belgium 40.2 40.2 33.99 33.99 33.99 33.99 33.99 33.99 33.99

Bulgaria 32.5 28 23.5 19.5 15 15 15 10 10

Croatia 35 20 20 20 20 20 20 20 20

Czech Republic 31 31 31 28 26 24 24 21 20

Denmark 30 30 30 30 28 28 25 25 25

Estonia 26 26 26 26 24 23 22 21 21

Finland 29 29 29 29 26 26 26 26 26

France 36.46 35.43 35.43 35.43 34.95 34.43 34.43 34.43 34.43

Germany 38.9 38.9 39.59 38.9 38.9 38.9 38.9 30.18 30.18

Hungary 18 18 18 16 16 17.33 20 20 20

Iceland 30 18 18 18 18 18 18 15 15

Ireland 20 16 12.5 12.5 12.5 12.5 12.5 12.5 12.5

Italy 36 36 34 33 33 33 33 27,5 27,5

Latvia 25 22 19 15 15 15 15 15 15

Luxembourg 37.5 30.38 30.38 30.38 30.38 29.63 29.63 29.63 28.59

Malta 35 35 35 35 35 35 35 35 35

Netherlands 35 34.5 34.5 34.5 31.5 29.6 25.5 25.5 25.5

Norway 28 28 28 28 28 28 28 28 28

Poland 28 28 27 19 19 19 19 19 19

Portugal 35.2 33 33 27.5 27.5 27.5 26.5 26.5 26.5

Romania 25 25 25 25 16 16 16 16 16

Slovak Republic 29 25 25 19 19 19 19 19 19

Slovenia 25 25 25 25 25 25 23 22 21

Spain 35 35 35 35 35 35 32.5 30 30

Sweden 28 28 28 28 28 28 28 28 26.3

Switzerland 24.7 24.4 24.1 24.1 24.1 21.32 21.32 21.17 21.17

United Kingdom 30 30 30 30 30 30 30 28 28

2006 2007 2008 2009Country 2001 2002 2003 2004 2005

91

(7a_7:�+:�^�-). Capital investment in foreign subsidiaries is expected to be less

tax-sensitive in companies with a greater ability to shift their income and thus

the coefficient of the interaction variable f() ∗ 7a_7:�+:�^�- is predicted to be

positive.

The empirical analysis takes into account a set of subsidiaries’ control

characteristics, as well as the host country’s characteristics. The vector >

consists of time-varying control variables with an associated vector of

coefficients ∁. The subsidiary’s size is measured by employing sales as a proxy.

The size of firms is expected to be positively associated with the volume of real

investment (see e.g. Dischinger and Riedel, 2011). The country-level

characteristics, specifically market size, level of development and labour costs,

are controlled, respectively, by the usual determinants, GDP, GDP per capita

and real unit labour costs. The data on the GDP and GDP per capita come from

the Eurostat database. The ULC is based on own calculations as follows.

Firstly, the ratio of labour compensation costs to the number of employees for

each foreign subsidiary and year is computed and secondly the mean of the

unitary costs at the country level is calculated.

Moreover, the estimated ordinary least squares subsidiary fixed effects

enable to control for subsidiaries’ time-constant unobserved heterogeneity (n=). The estimation approach also accounts for a full set of year dummies o", which

capture shocks over time, common to all subsidiaries.

2.5 Empirical results

As discussed in the previous sections, this essay explores both heterogeneous

ability and incentives for profit shifting to identify ‘shifter’ and ‘non-shifter’

companies. This strategy enables the assessment and comparison of the tax

sensitivity of real investment for these distinct subsamples. Therefore, this

section provides two sets of estimation models, corresponding to the

heterogeneous profit-shifting ability and to the heterogeneous incentives for

profit shifting.

92

2.5.1 Investment responses to taxation and profit-s hifting

ability

To ascertain the effect of taxation on real investment in the context of profit

shifting, the heterogeneous ability to shift paper profits out of higher-tax

countries was considered. Accordingly, the dummy variable 7a_7:�+:�^�- takes

the value of 1 for highly intangible-intensive firms and 0 otherwise. A subsidiary

is labelled as ‘highly intangible-intensive’ if it reports intangible assets above the

overall subsidiaries’ mean and ‘low intangible-intensive’ if the amount of

intangible assets is below the sample mean. Table 2.4 displays the estimations.

Equation 1 from Table 2.4 takes the full sample of foreign subsidiaries

from EU and non-EU countries yielding an estimated coefficient of the host

country’s f() of -1.183, which is significant at the 1 per cent level. The

estimated coefficient for subsidiaries located in EU countries owned by EU

parent companies is -1.147, significant at any conventional significance level.

This means that an increase of 1 percentage point in the host country’s f() is

associated with a decrease of approximately 1.1 per cent in fixed assets. These

semi-elasticities are slightly lower than those found in meta-analyses by De

Mooij and Ederveen (2003, 2006) and Feld and Heckmeyer (2011), which range

from -2.1 to -3.3.

Regressions 2 and 4 additionally consider the interaction between the

dummy variable 7a_7:�+:�^�- and the f(). The estimated coefficient of

7a_7:�+:�^�- for the full sample (regression 2) is 0.491, suggesting that

subsidiaries that are intensive in intangible assets have higher levels of real

investment. The interaction variable coefficient, although positive, is not

statistically significant at any conventional level.

When the sample is restricted to those subsidiaries located in EU

countries, the estimated interaction term is 0.406, which is positive and

significant at the 5 per cent level, consistent with the inverse association of

investment responsiveness to taxation and profit-shifting activities. The

corresponding tax semi-elasticities for both subsamples with a low level of

intangibles and a high level of intangibles are respectively -1.205 and -0.799.

93

The F-test for the equality of both estimated coefficients is rejected at the 1 per

cent level of significance.

Table 2.4

Effect of Corporate Taxation on the Subsidiaries’ Fixed Assets under

Heterogeneous Profit-Shifting Ability

Note: The estimation is by the fixed-effects linear regression model, where the dependent variable is the subsidiary fixed assets. The estimation takes into account both firms and time fixed effects. Standard errors are reported in parenthesis after clustering by foreign subsidiary. The bottom of the table indicates the countries taken, firm-year and number of subsidiaries, F-test and adjusted R-squared. *** denotes significance at 1%, ** significance at 5% and * significance at 10%.

These results suggest that the real investment of foreign subsidiaries with

a greater ability to shift paper profits from higher- to lower-tax countries is less

responsive to taxation than for those with less ability to engage in such

activities.

(1) (2) (3) (4)

-1.183*** -1.132*** -1.147*** -1.205***(0.169) (0.198) (0.193) (0.227)

0.491*** 0.459***(0.052) (0.057)

0.266 0.406**(0.184) (0.202)

0.527*** 0.486*** 0.532*** 0.492***(0.013) (0.013) (0.014) (0.014)

0.125 -0.031 0.183 0.050(0.112) (0.117) (0.122) (0.128)

0.645*** 0.610*** 0.668*** 0.626***(0.071) (0.071) (0.077) (0.077)

-0.073* 0.007 -0.092* -0.016(0.042) (0.040) (0.047) (0.046)

-6.733*** -4.950*** -7.596*** -5.922***(0.753) (0.776) (0.829) (0.856)

Year dummies Yes Yes Yes Yes

Countries EU/non-EU EU/non-EU EU EU

Number of observations 122,908 115,416 102,368 95,827

Number of subsidiaries 20,130 19,841 16,707 16,457

F-test 304.5 329.4 264.5 279.0R-squared 0.20 0.22 0.20 0.23

GDP

ULC

Constant

Sales

GDPpc

VariablesDependent variable: Log (Fixed Assets)

STR

IA_Intensity

IA_Intensity*STR

94

The real investment measure used above consists of the foreign

subsidiaries’ fixed assets. The location of fixed assets is probably to be

determined by profit-shifting incentives as, from a strictly fiscal perspective,

companies will prefer to hold intangible assets in low-tax countries (e.g.

Clausing, 2009; Dischinger and Riedel, 2011). Although it is difficult to separate

fully financial and real responses to taxation, it is reasonable to expect real

measures of firms’ activity (e.g. employment) to be ‘less sensitive to tax-

motivated financial manipulation’ than fixed assets (Clausing, 2009, p. 713).

Therefore, the econometric model is employed using the foreign subsidiary

employment figure as the dependent variable. The subsidiary’s employment

figure consists of the number of employees provided by the Amadeus database

(log-transformed). Using the same specifications described previously, the

estimates are presented in Table 2.5.

The semi-elasticities of the f() in Table 2.5 are slightly higher than those

obtained earlier. For the subsample of companies located in the EU, the

estimated coefficient of the f() is -1.751, which is statistically significant at the

1 per cent level. The estimations for the full sample (EU and non-EU

subsidiaries) are qualitatively similar. When the 7a_7:�+:�^�- dummy is added in

column 4, the semi-elasticities of the f() are -2.665 and -2.192, respectively for

the subsamples of firms with low and high levels of intangible assets. Again, the

F-test for the equality of the two coefficients is rejected at any conventional level

of significance. The coefficients of the control variables have the predicted

signs.

As discussed in Subsection 2.4.1, for parent companies owning more than

one foreign subsidiary in a host country, the firm-level variables (i.e. fixed-

assets, sales, employment figures) are aggregated at the country-level. In order

to test for the sensitivity of the estimations to this option, the model is

alternatively applied to the sample of foreign subsidiaries not aggregated at the

95

Table 2.5

Effect of Corporate Taxation on the Subsidiaries’ Employment under

Heterogeneous Profit-Shifting Ability

Note: The estimation is by the fixed-effects linear regression model, where the dependent variable is the subsidiary employment. The estimation takes into account both firms and time fixed effects. Standard errors are reported in parenthesis after clustering by foreign subsidiary. The bottom of the table indicates the countries taken, firm-year and number of subsidiaries, F-test and adjusted R-squared. *** denotes significance at 1%, ** significance at 5% and * significance at 10%.

country level. The mean of the logarithm of intangible assets used to split the

sample into two subsamples (high and low intensity in intangible assets) now

corresponds to the mean of the disaggregated sample, which is slightly higher

compared with that reported in the descriptive statistics above. The estimates

are displayed in Table 2.6.

(1) (2) (3) (4)

-1.538*** -2.333*** -1.751*** -2.665***(0.127) (0.154) (0.150) (0.184)

0.017 -0.006(0.033) (0.036)

0.419*** 0.473***(0.120) (0.130)

0.475*** 0.461*** 0.473*** 0.462***(0.009) (0.009) (0.010) (0.010)

0.914*** 1.100*** 0.889*** 1.071***(0.072) (0.076) (0.078) (0.083)

0.212*** 0.149*** 0.237*** 0.160***(0.046) (0.045) (0.049) (0.049)

-0.398*** -0.540*** -0.422*** -0.574***(0.026) (0.027) (0.028) (0.030)

-10.300*** -10.563*** -10.226*** -10.206***(0.495) (0.496) (0.534) (0.531)





F-test 400.3 352.8 343.8 304.9R-squared 0.22 0.21 0.22 0.21

ULC

Constant

Sales

GDPpc

GDP

VariablesDependent variable: Log (Number of employees)

STR

IA_Intensity

IA_Intensity*STR

96

Table 2.6

Effect of Corporate Taxation on the Subsidiaries’ Employment under

Heterogeneous Profit-Shifting Ability: Sample not Aggregated

Note: The estimation is by the fixed-effects linear regression model, where the dependent variable is the subsidiary employment. Each foreign subsidiary enters the sample on its own rather than being aggregated when controlled by the same parent company. The estimation takes into account both firms and time fixed effects. Standard errors are reported in parenthesis after clustering by foreign subsidiary. The bottom of the table indicates the countries taken, firm-year and number of subsidiaries, F-test and adjusted R-squared. *** denotes significance at 1%, ** significance at 5% and * significance at 10%.

In column 2 of Table 2.6 the estimated coefficient of the interaction

between the 7a_^:�+:�^�- variable and the f() variable is 0.235, having the

expected sign and being only significant at the 10 per cent level. When the

sample is restricted to those subsidiaries located in the EU (column 4), the

estimated coefficient of the interaction variable is 0.327, which is significant at

the 5 per cent level. The corresponding semi-elasticities for the EU-located

(1) (2) (3) (4)

-2.085*** -2.796*** -2.195*** -3.026***(0.121) (0.140) (0.139) (0.164)

0.025 -0.005(0.035) (0.037)

0.235* 0.327**(0.123) (0.131)

0.432*** 0.426*** 0.429*** 0.423***(0.009) (0.009) (0.009) (0.009)

1.197*** 1.338*** 1.142*** 1.268***(0.067) (0.071) (0.072) (0.076)

0.092** 0.080** 0.134*** 0.111**(0.041) (0.041) (0.044) (0.044)

-0.348*** -0.515*** -0.370*** -0.547***(0.023) (0.025) (0.025) (0.027)

-11.188*** -11.606*** -11.060*** -11.107***(0.467) (0.469) (0.501) (0.499)





F-test 381.1 325.0 329.0 280.0R-squared 0.15 0.14 0.15 0.14

Sales

VariablesDependent variable: Log (Number of employees)

STR

IA_Intensity

IA_Intensity*STR

GDPpc

GDP

ULC

Constant

97

subsidiaries with high intensity and low intensity in intangible assets are -2.699

and -3.026, respectively.

Furthermore, the coefficients of the f() variable are negative and

significant in all specifications and the control variables have the expected

coefficient sign.

These estimates again point in the direction suggested by previous

results: the real responses of companies’ investment to the host country’s

corporate taxation are estimated to be inversely related to the firms’ ability to

shift their income.

2.5.2 Effects of corporate taxation on investment u nder

heterogeneous incentives for profit shifting

Since Grubert and Mutti (1991), Harris et al. (1993) and Hines and Rice (1994),

the literature on profit shifting has agreed that profit shifting activities increase

as the tax difference between home and host countries becomes larger.

Furthermore, Huizinga and Laeven’s (2008) findings suggest that - in the

context of European countries - profit shifting is associated with a weighted

average tax rate difference. Therefore, an alternative approach to examining the

hypothesis is to test whether subsidiaries’ real investment is less (more) tax

responsive when the tax rate differences are large (small). It is anticipated that

as a result of profit shifting, at the extremes of tax rate differences (both

negative and positive), a subsidiary’s investment response to corporate taxation

is lower than when the tax rate difference is small.

The rationale is that international profit shifting activities should increase

as the tax rate difference becomes larger. Therefore, under the hypothesis, in

subsidiaries with larger tax rate differences, less tax responsiveness of real

investment should be observed. With this purpose, the essay makes use of two

tax rate differences: the STR differential between the host and the home

country and the composite tax variable (i.e. the weighted average tax rate

difference).

98

Hence, after creating a continuous variable consisting of the STR

differential between host and home countries, a binary variable is generated

(descriptive statistics are provided in Table 2.2 - (,h1^GG(f())), taking the

value of 1 if the tax difference is higher than 0.05 or lower than -0.05 and 0

otherwise. The threshold is half the lowest STR and is approximately the

standard deviation of the tax rate differential variable. To illustrate the

construction of the (,h1^GG variable, consider that a German multinational

holds a subsidiary in Portugal. The STR difference in 2009 of the foreign

subsidiary is -3.68 per cent (i.e. q��rs � q�t��"uv = 26.5 − 30.18). Therefore,

the (,h1^GG variable in 2009 would take the value 0 (i.e. −3.68 ∈ �−5, 5�). As mentioned above and alternatively, the composite tax variable

developed by Huizinga and Laeven (2008) is used, which consists of a

weighted average of tax difference between the foreign subsidiary and the

parent company. The composite tax variable is defined as follows:

'=x = 1(1 − q=)

gx1 − qx (q= − qx) g=1 − q= +

gx1 − qx (3)

where the indexes i and j denote the subsidiary and parent companies,

respectively. g consists of the true profits of the respective firms and, following

Markle (2010), revenues are used as a proxy.

The composite tax variable ' summarizes information concerning profit-

shifting incentives and opportunities. The profit-shifting incentives arise from the

corporate tax rate difference between subsidiary and parent companies, while

the profit-shifting opportunities are associated with the level of real profits

generated. To illustrate the composite variable concept, consider two pairs of

companies (parent-subsidiary) 1 and 2 with the same tax rate difference; this

generates similar incentives to shift profits from, say, the host to the home

country. In the circumstance that the subsidiary from pair 1 generates low real

profits, the opportunity to engage in profit shifting from the subsidiary to the

parent company is relatively low as there is a limited amount of profits to be

shifted. In contrast, considering that the subsidiary from pair 2 earns a

significant amount of profits, it has greater opportunities to shift profits. Hence,

99

the composite tax variable ', despite the similar profit-shifting incentives, would

be higher for company pair 2 (see Huizinga and Laeven, 2008, for further

discussion). The use of the weighted average of the tax rate difference as an

alternative tax difference measure is convenient as it does not rely only on tax

rate differences but weights them according to the amount of profits generated.

Table 2.7

Effect of the Corporate Tax Rate on Real Investment under

Heterogeneous Profit-Shifting Incentives

Note: Estimation is made by the fixed-effects linear regression model where the dependent variable is the subsidiary fixed assets. Regression 1 uses the standard STR tax difference while regression 2 takes the tax difference by Huizinga and Laeven (2008). (,h1^GG is equal to 1 if the respective tax rate differential is higher than 0.05 or lower than -0.05 and 0 otherwise. The estimation relies on firm and time fixed effects. Standard errors are reported in parenthesis after clustering by foreign subsidiary. The bottom of the table indicates the firm-year and number of subsidiaries, F-test and adjusted R-squared. *** denotes significance at 1%, ** significance at 5% and * significance at 10%.

STR difference Tax difference: C

(1) (2)

-1.676*** -1.453***(0.285) (0.357)

-0.202*** -0.246***(0.075) (0.094)

0.650*** 0.850***(0.242) (0.315)

0.532*** 0.538***(0.014) (0.020)

0.220* 0.058(0.122) (0.169)

0.681*** 0.727***(0.077) (0.107)

-0.095** -0.054(0.047) (0.070)

-7.943*** -7.276***(0.833) (1.179)

Year dummies Yes Yes

Countries EU EU

Number of observations 102,368 51,606

Number of subsidiaries 16,707 10,167

F-test 230.0 107.5R-squared 0.20 0.20

GDP

ULC

Constant

Dependent var.: Log (Fixed Assets)

Sales

GDPpc

Variables

STR

TaxDiff

STR*TaxDiff

100

The descriptive statistics of the weighted average tax rate is displayed in

Table 2.2. The mean is -3.1 per cent with minimum and maximum values of -

25.5 and 30.7, respectively. Similarly to the STR differential, a dummy variable

was created, taking the value of 1 for higher tax differences and 0 otherwise.

The estimations are presented in Table 2.7.

Equation 1 of Table 2.7 provides estimations using the STR difference

between the host and the home country, while equation 2 concerns the

composite tax variable. In regression 1, the estimated coefficient of the f() is -

1.676, which is significant, indicating a deterrent effect of corporate taxation on

subsidiaries’ fixed assets. The interaction variable between the f() and the tax

difference dummy variable enters, as expected, as positive with a coefficient of

0.650, which is highly significant. Accordingly, the f() impact on real

investment is estimated to be significantly lower when extreme values of tax

differences are observed. Alternatively, the semi-elasticity of the f() is -1.676

for foreign subsidiaries in which (,h1^GG ∈ [�0.05; 0.05�, and -1.026 for those in

which the tax difference is beyond these limits. The test of equality of the

associated coefficients is clearly rejected.

Regression 2 takes as an alternative tax difference measure the

composite tax variable ', which consists of a weighted average tax difference

between foreign subsidiary and parent companies. The merit of this measure is

that it comprises both profit-shifting incentives (the tax rate difference) and

opportunities (the scale of a firm’s operations). The number of observations

drops significantly because of a lack of information on parent companies’ sales;

however, they are sufficient to employ a fixed-effects model. The estimated

coefficient of the f() equals -1.453, which is significant at the 1 per cent level

of significance. For the subsample of firms with a higher weighted average tax

difference, the f() impact on fixed assets is estimated to drop to as low as -

0.603, which is significant at the 5 per cent level. This means that an increase of

1 percentage point in the foreign subsidiary tax rate leads to a decrease in the

volume of investment in fixed assets of about 1.45 per cent for companies with

low tax differences, while the decrease in the investment is only about 0.6 per

cent for those companies for which the tax differences are higher.

101

The results were subject to a battery of robustness checks, consisting of

replacing the dependent variable with the subsidiaries’ employment figure and

changing the thresholds to ±0.04 and ±0.06. The estimates obtained by taking

the number of employees as a measure of real investment are provided in

Table 2.8.

Table 2.8

Robustness Checks I

Note: Estimation is by the fixed-effects linear regression model where the dependent variable is the subsidiaries’ employment figure. (,h1^GG is equal to 1 if the tax rate differential is higher than 0.05 or lower than -0.05 and 0 otherwise. The estimation relies on firm and time fixed effects. Regression 1 uses the standard tax rate difference and regression 2 makes use of the tax difference by Huizinga and Laeven (2008). Standard errors are reported in parenthesis after clustering by foreign subsidiary. The bottom of the table indicates the firm-year and number of subsidiaries, F-test and adjusted R-squared. *** denotes significance at 1%, ** significance at 5% and * significance at 10%.

STR difference Tax difference: C

(1) (2)

-2.235*** -2.029***(0.218) (0.274)

-0.222*** -0.155**(0.054) (0.069)

0.608*** 0.430*(0.181) (0.242)

0.473*** 0.466***(0.010) (0.015)

0.912*** 0.998***(0.078) (0.110)

0.264*** 0.057(0.049) (0.070)

-0.429*** -0.407***(0.029) (0.042)

-10.592*** -8.941***(0.542) (0.770)

Year dummies Yes Yes

Countries EU EU

Number of observations 91,663 46,142

Number of subsidiaries 16,217 9,816

F-test 303.7 138.7R-squared 0.22 0.21

GDP

ULC

Constant

Dependent var.: Log (Number of employees)

Sales

GDPpc

Variables

STR

TaxDiff

STR*TaxDiff

102

The obtained estimates in Table 2.8 are qualitatively similar to those

previously displayed; however, in Regression 2, the coefficient of the two-way

interaction variable is only significant at 10 per cent level of significance.

The model was rerun for different thresholds of tax rate differential, that is,

using ±0.04 and ±0.06 as alternative thresholds. The results are displayed in

Table 2.9.

Table 2.9

Robustness Checks II

Note: Estimation is by the fixed-effects linear regression model where the dependent variable is the subsidiaries’ fixed assets. The (,h1^GG threshold in columns 1-2 is ±0.04 and in columns 3-4 it is ±0.06. The estimation relies on firm and time fixed effects. Regressions 1 and 3 use the standard STR tax difference and Regressions 2 and 4 use the composite tax difference by Huizinga and Laeven (2008). Standard errors are reported in parenthesis after clustering by foreign subsidiary. The bottom of the table indicates the firm-year and number of subsidiaries, F-test and adjusted R-squared. *** denotes significance at 1%, ** significance at 5% and * significance at 10%.

STR difference Tax difference: C STR difference Tax difference: C

(1) (2) (3) (4)

-1.632*** -1.579*** -1.480*** -1.204***(0.299) (0.375) (0.278) (0.341)

-0.153* -0.272*** -0.134* -0.156*(0.078) (0.100) (0.076) (0.088)

0.544** 0.955*** 0.426* 0.600*(0.247) (0.322) (0.245) (0.313)

0.532*** 0.538*** 0.532*** 0.538***(0.014) (0.020) (0.014) (0.020)

0.207* 0.049 0.212* 0.041(0.122) (0.169) (0.123) (0.168)

0.681*** 0.737*** 0.677*** 0.717***(0.077) (0.107) (0.077) (0.106)

-0.095** -0.060 -0.093** -0.050(0.047) (0.070) (0.048) (0.070)

-7.838*** -7.268*** -7.881*** -7.096***(0.832) (1.175) (0.843) (1.172)


Countries EU EU EU EU



F-test 229.5 107.9 230.0 107.4R-squared 0.20 0.20 0.20 0.20

Threshold tax rate difference: +/- 0.06

STR

TaxDiff

STR*TaxDiff

Variables

Threshold tax rate difference: +/- 0.04

Sales

GDPpc

GDP

ULC

Constant

103

The estimations in Table 2.9 yield significant f() coefficients, with the

expected sign. Moreover, considering different thresholds, the two-way

interaction between the host country’s tax rate and the dummy (,h1^GG is

positive in all the regressions, as expected. However, when using the limit

±0.06, the interaction variable is only significant at the 10 per cent level.

Overall, the estimates considering different thresholds seems to point in the

same direction as those obtained above using ±0.05.

Summarizing, the results obtained suggest that subsidiaries’ real

investment responses to corporate taxation are less pronounced for companies

engaging in more international profit-shifting activities. In other words, the

evidence indicates an inverse relation between profit-shifting activities and the

tax responsiveness of real investment.

2.6 Conclusions

This essay provides evidence concerning the relation between the tax

responsiveness of foreign real investment and cross-border profit-shifting

activities. Using a sample of European foreign subsidiaries, the extent to which

tax-planning activities imply investment to be less responsive to corporate

taxation was examined for the period 2001-2009. This study contributes to the

existing literature in several ways.

First, the empirical literature on the relation between real foreign

investment and income-shifting activities is scarce, particularly in the European

context. Moreover, the existing literature focuses on investment located either in

very high- or in very low-tax countries. Using micro-level data on real

investment from a sample of European foreign subsidiaries, this research

contributes to the lack of empirical literature in this area.

Second, evaluating how corporate taxation affects real investment

decisions in the context of profit shifting contributes to the current discussion on

tax coordination within the EU from a more articulated perspective of

104

gains/losses in terms of tax distortions of investment and profit-shifting

activities.

Using a fixed-effects model, the estimations confirm that a greater ability

to shift profits to a lower-tax location is associated with a lower investment

response to corporate taxation in the host country. Furthermore, the tax

responsiveness of real investment of firms with greater incentives to relocate

their profits appears to be lower when compared with those companies with

fewer incentives.

Overall, there is evidence that the real investment responsiveness to

corporate taxation is inversely associated with cross-border profit shifting.

Under the current separate accounting system in the EU, real investment

appears to be less tax responsive over the years. Thus, the change towards a

system of common tax rules to determine the tax base may come at the

expense of a substantial additional distortion of investment.

105

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Essay 3

Transfer Pricing Strictness and Profit

Shifting within European Multinationals

111

3.1 Introduction

Intra-company prices must be subordinate to the arm’s length principle.

Transfer prices, and consequently taxable income, are adjusted for tax

purposes if the prices are not arm’s length prices. Most countries adhere to this

approach in order to mitigate double taxation and also to curb losses of tax

revenue.

The conditions for commercial and financial transactions between

independent companies are determined by market forces; however, those

established between related parties are not directly affected by external market

forces in the same way (OECD, 2010). Multinational companies seem to take

advantage of the uncertainty concerning what is an appropriate intra-company

price to manipulate transfer prices in order to minimize their worldwide tax

burden.

As noted in the previous essay, there is extensive literature that provides

indirect evidence of significant cross-border profit-shifting activities (for surveys,

see e.g. Hines, 1999; Devereux, 2006; Heckemeyer and Overesch, 2013).

Huizinga and Laeven (2008), for instance, found that the ratio of profit shifting to

the tax base is estimated to be 13.6 per cent in Germany and 4.8 per cent in

Portugal.

Other studies analyse transfer prices directly to assess the effects of

taxation on intra-firm trade prices (e.g. Swenson, 2001; Clausing, 2003; Bernard

et al., 2006; Blouin et al., 2011). The evidence confirms a significant relationship

between the host country’s corporate tax rate and the prices of intra-company

operations, and this is consistent with the hypothesis that multinational

companies engage in profit-shifting activities through the manipulation of

transfer prices. Moreover, Heckemeyer and Overesch (2013) found that transfer

pricing, along with licensing, is a more commonly used profit-shifting channel

than intra-company debt.

112

The widespread use of tax-planning strategies with serious implications for

the erosion of the tax base has been moving up political agendas and has led

governments to increase their scrutiny of tax avoidance by multinational

companies. Many countries have introduced anti-tax-avoidance regulations to

prevent multijurisdictional companies from strategically reporting earnings in

lower-tax countries. The anti-avoidance measures that have been enacted

include transfer pricing regulations, rules limiting the tax deductibility of internal

debt (e.g. thin-capitalization, earnings-stripping rules and allocation rules) and

provisions to prevent multinationals from shifting highly mobile passive income

to lower-tax countries (e.g. non-resident withholding tax rates, controlled foreign

corporation rules and the Subpart F regime).

The impact of regulations against tax planning dealing with internal debt

and passive investments has been examined in the European context (e.g.

Overesch and Wamser, 2010; Buettner et al., 2012; Ruf and Weichenrieder,

2012; Buettner and Wamser, 2013). The findings of these studies are

encouraging as they indicate that such regulatory initiatives deter tax planning

to some extent; this might limit the adverse revenue consequences of such

activities. However, few studies have been devoted to evaluating the effects of

transfer pricing regulations on dampening profit-shifting activities (for

exceptions, see Klassen and Laplante, 2012 and Lohse and Riedel, 2012).

This essay addresses the introduction of more stringent transfer pricing

regulations and of mechanisms to enforce such rules (which will also termed a

transfer pricing framework), and is intended to investigate the extent to which

the tightening of a transfer pricing framework deters profit-shifting behaviour by

multinational companies. Shedding light on such effects is relevant from a fiscal

policy perspective, as it reveals the extent to which governments are able to

prevent the shifting of taxable income through intra-company transfer prices

manipulation.

The transfer pricing framework of a country is difficult to define because it

depends on distinct and subjective attributes. Nevertheless, this essay

approaches it by building a single measure, one which encompasses the main

attributes of a transfer pricing framework, by means of an index. The self-

113

constructed strictness index mirrors the extent of the implementation of transfer

pricing regulations and of enforcement mechanisms over the years.

Using a sample of 27,278 European foreign subsidiaries, this essay

exploits the sensitivity of firms’ reported taxable income to the interaction

between the strictness index and incentives for profit shifting. The results

suggest that imposing stricter transfer pricing rules, together with tighter

mechanisms to enforce those rules, has an impact by decreasing profit-shifting

activities. This study not only contributes to the scarce literature on the effect of

specific transfer pricing regulations, but also provides a comprehensive

strictness index for transfer pricing which is novel in this specific field.

The essay is structured as follows. Section 3.2 provides some background

drawing on previous empirical literature on the effect of anti-tax-avoidance

measures, and states the hypothesis. Section 3.3 assesses the evolution of

transfer pricing rules and their enforcement in Europe. Section 3.4 develops the

index that will be used to measure the strictness of the transfer pricing

framework. Section 3.5 describes the data used, and section 3.6 the empirical

strategy employed. The empirical results, together with robustness checks, are

presented in Section 3.7 and Section 3.8 concludes the essay.

3.2 Background and hypothesis development

In a broad body of empirical literature on international profit shifting, it has been

shown that differences in tax systems across countries incentivize

multijurisdictional companies to reallocate profits. The effects of anti-avoidance

countermeasures have been studied, with the intention of shedding light on

whether or not such countermeasures are effective in dampening the

increasingly creative tax-planning that is carried out. Compliance with the

requirements of this type of legislation imposes costs on profit-shifting

companies. This section provides a brief literature review focused on the effect

of anti-avoidance regulations, and proceeds to the development of the research

hypothesis, which articulates the incentives for and the costs of profit shifting.

114

3.2.1 Effectiveness of anti-avoidance measures

Intra-company debt, transfer pricing and passive investments are some of the

channels through which profit shifting is carried out. Governments’

countermeasures against tax planning take many forms such as thin-

capitalization rules, transfer pricing rules and controlled foreign company (CFC)

provisions.

Empirical literature has emerged examining the effectiveness of

governments’ anti-avoidance measures. Buettner et al. (2012) used a micro-

level data set of German multinational companies over the period 1996-2004

and found a significant and negative association between the implementation of

thin-capitalization rules and the use of intra-company loans. Also, Overesch and

Wamser (2010) explored the amendments made to these rules in 2001 and

2004, which reduced the permitted debt-to-equity ratios, and found similar

effects.

As mentioned above, another regulatory initiative undertaken by several

governments is the so-called legislation on CFC; this limits the use of foreign

subsidiaries to shelter passive investment income from home taxation. Ruf and

Weichenrieder (2012) assessed the effectiveness of such an anti-avoidance

measure in Germany, and found evidence consistent with the hypothesis

predicting that the CFC rule would limit the shifting of passive assets to low tax

countries. Exploiting the role of internal debt as a channel for shifting profits,

Buettner and Wamser (2013) obtained evidence indicating that profit shifting

through internal debt is fairly negligible. Further tests led the authors to suggest

that the small effects of the host country’s tax rate on internal debt can partly be

explained by the implementation of the CFC rule.

Since the early 1990s, governments following the path of anti-avoidance

measures have been implementing transfer pricing regulations, primarily based

on the OECD’s transfer pricing guidelines. Few studies have evaluated the

extent to which these legislative initiatives deter profit-shifting behaviour.

Klassen and Laplante (2012) analysed income shifting both into and out of US

multinational companies and considered the costs of shifting income. Their

regulatory cost measurement comprises a combination of US enforcement of

115

transfer pricing rules (i.e. the IRS audit rate for large corporations) and transfer

pricing regulations implemented in the partner countries (i.e. the existence of

transfer pricing rules weighted by the country’s total trade with the U.S.). The

evidence suggests that although US firms shift income to lower-tax countries,

the incentive responsiveness is higher when the costs of shifting to those

countries are lower.

In the context of European countries, Lohse and Riedel (2012) evaluated

whether the introduction of transfer pricing regulations plays a role as a

mechanism that deters income shifting. They define three transfer pricing

categories reflecting European countries’ transfer pricing legislation: (1)

countries without legislation or with general reference to the arm’s length

principle; (2) countries in which documentation requirements only exist in

practice; and (3) countries that have introduced documentation requirements

into their national tax law. The results seem to indicate that transfer pricing

legislation has a negative effect on income shifting activities. The estimated

effect varies from 38 per cent to 80 per cent depending on the strictness of the

transfer pricing regulations in force.

Lohse and Riedel (2012) use the host country’s tax rate as a proxy for the

incentive for profit shifting; however, the host country’s tax burden also has an

impact on the level of investment, which in turn affects the reported profits.

Such an approach is potentially confounding, as the lower levels of reported

profits in higher-tax countries might also be driven by investment decisions

rather than being exclusively due to profit shifting.

3.2.2 Costs of shifting and incentives for profit s hifting

Profit shifting involves trade-offs between the benefits of having profits taxed at

a lower tax rate and the costs of shifting (Klassen and Laplante, 2012). The

benefits that arise from shifting profits from higher- to lower-tax countries are

associated with tax rate differentials. Consider a parent company located in

country A with a subsidiary located in country B, where the corporate tax rates

are 30 and 20 per cent respectively. For each EUR1 of profits shifted from the

parent company to the subsidiary, the gross tax saving to the corporate group

116

would be 0.1, which is rather meaningful, as it represents a decrease of about

33 per cent of the group’s tax burden (i.e. 30% − 20%� × /4)1 30% × /4)1⁄ ).

The strategic location of profits in lower-tax countries involves costs,

namely the costs of compliance with transfer pricing rules, penalties and the

costs of one-side income adjustments. For instance, in the Ernst & Young’s

2003 Transfer Pricing Survey, parent companies reported that 40 per cent of

their tax adjustments in the past three years had led to double taxation. The

shift to a stricter transfer pricing framework generates greater scrutiny of profit-

shifting activities by tax authorities, and higher regulatory costs. The benefit of

shifting income is consequently reduced by stringent rules and legal

enforcement. In this scenario, the incentive for profit shifting associated with the

tax rate difference benefit is dampened by the cost of shifting. Thus, the

hypothesis to be tested is as follows:

The stricter the host country’s transfer pricing framework, the lower the

incentive of a foreign subsidiary company for shifting profits to a lower-

tax country.

In Lohse and Riedel (2012), the transfer pricing framework relies almost

exclusively on the existence of documentation requirements. Even though

transfer pricing regulations might trigger the implementation of some sort of

enforcement system, there are several countries where enforcement is carried

out by making use of the existing general tax laws (e.g. the penalty regime), and

countries that have been increasing and refining their enforcement over the

years (e.g. by increasing the human resources of their tax authorities). In this

regard, Ernst & Young’s 2009 Transfer Pricing Survey emphasized that tax

authorities ‘are adapting their audit strategies and policies and developing better

tools, processes and capabilities’ and ‘sharpening their enforcement focus and

carrying out more sophisticated audits’ (Ernst & Young, 2009, p. 6).

One can therefore conclude that the design of a measure of the strictness

of a country’s transfer pricing framework should comprise, in addition to

regulations, the enforcement mechanisms in place over time. Therefore, in this

essay, the transfer pricing framework under consideration involves not only

statutory rules and documentation requirements, but the introduction or

117

existence of mechanisms to enforce compliance with these rules. The following

section discusses the evolution of transfer pricing regulations and their

enforcement in Europe.

3.3 Transfer pricing rules and enforcement

mechanisms in Europe

Over the period 2001-2009, transfer pricing regulations increased significantly in

European countries. Most countries in the sample follow the OECD’s guidelines

for transfer pricing. As noted by Lohse and Riedel (2012), the implementation of

transfer pricing rules in Europe is in different stages in different countries.

Countries such as Cyprus, Iceland and Ireland have statutory rules that boil

down to the general prescription that transaction between related parties should

be carried out under in accordance with the arm’s length principle. As well as

implementing this principle, many other countries, such as Portugal, Belgium

and the Netherlands, have already incorporated into their national laws

guidelines on the application of transfer pricing rules and a comprehensive list

of documentation to be disclosed in annual tax returns or provided to tax

authorities upon request.

The number of countries issuing detailed transfer pricing guidelines grew

by 60 per cent from 2001 to 2009. Regarding documentation, only two of the

countries in the sample had implemented formal documentation requirements in

2001 (i.e. Poland and United Kingdom), but by 2005 nine countries has done

so, and by 2009 the number was twenty. There are also a significant number of

European countries where the tax law does not address documentation

requirements, but where in practice the tax authorities require some supporting

documentation in the course of a tax audit (see Lohse et al., 2012).

The enforcement mechanisms are capable of influencing the application of

and compliance with transfer pricing rules. In recent years many countries ‘have

introduced increasingly hard-hitting penalties’ (Ernst & Young, 2009, p. 5).

Several European countries have introduced specific transfer pricing penalties,

such as Germany (2004), Denmark (2006) and Spain (2009) (Lohse et al.,

118

2012). However, many others do not have special penalties for transfer pricing,

and hence the general tax law penalties are applicable.

The penalties for failure to comply with the transfer pricing rules comprise

a penalty for failure to have documentation, a penalty for the transfer pricing

adjustment and a late interest penalty. Although the adjustment and interest

penalties are usually already in place in the general tax law, a penalty for lack of

documentation is likely to be introduced at the time of the introduction of

documentation requirements. Importantly, however, there are plenty of

examples where documentation default does not trigger any penalties. For

instance, in the Netherlands companies are obliged to prepare supporting

documentation regarding transfer prices, but failure to do so does not lead to a

penalty but rather a shifting of the burden of proof regarding the arm’s length

nature of the transfer prices (Ernst & Young, 2009). In other countries (e.g.

Sweden and Poland), the non-existence of documentation (when it is required)

does not lead to a penalty; instead, when transfer prices are considered not to

obey the arm’s length principle, the penalties (for adjustment and late interest)

can be reduced if the company has prepared documentation.

Apart from penalties, the past decade has seen an increase in the

resources available to tax administrations for transfer pricing. Ernst & Young’s

2003 Transfer Pricing Survey stressed that countries with formal regulations

already in place were seeking a greater level of compliance. In the same report

it was pointed out that there were signs indicating that transfer pricing audit

activity would increase and that audit techniques would become increasingly

more sophisticated.

In fact, a number of European tax authorities were equipped with more

transfer pricing resources. For instance, in the years after the introduction of

transfer pricing regulations in 2001, the Portuguese tax authority was equipped

with an increasing number of transfer pricing audit specialists. Furthermore,

several countries have been writing specific procedures for auditing transfer

prices (e.g. Belgium, Finland and the Netherlands). This reflects the increasing

ability for tax authorities to perform transfer pricing audits.

119

As mentioned above, although the introduction of transfer pricing

regulations would be expected to trigger the development of enforcement

mechanisms, there seem to be discrepancies in the timing of the introduction of

regulations, on the one hand, and enforcement, on the other. For example, in

Hungary, although the introduction of documentation requirements occurred in

2002, a special transfer pricing team was only formed in 2008. Therefore, using

both transfer pricing dimensions (i.e. regulation and enforcement) is expected to

improve the accuracy of the assessment of the strictness of a country’s transfer

pricing framework.

3.4 Measuring the strictness of transfer pricing

frameworks

A country’s transfer pricing framework is defined as the set of rules and

practices, as well as enforcement instruments, established to regulate price

setting between associated companies and ensure compliance with the

regulations in force. The attributes characterizing such a framework are

intrinsically qualitative. The construction of a strictness index is seen as a

procedure allowing a quantitative approach to the framework status.

3.4.1 Development of the transfer pricing strictnes s index

The strictness of the transfer pricing framework in a given country is difficult to

measure because it depends on different subjective attributes. Under these

circumstances, it is however possible to build a single measure of the strictness

of the transfer pricing framework by means of an index (see e.g. Simmons,

2003, for an index on tax attractiveness). Therefore, an index is built based on

the degrees of implementation of transfer pricing legislation and of different

mechanisms to enforce the transfer pricing rules. The index, whose attributes

are discussed below, is built on two fundamental pillars: transfer pricing

regulations and law enforcement mechanisms.

120

The degree of incorporation of binding rules into national laws creates a

tighter or a laxer legal environment regarding transfer pricing. For example, in a

country where there are no documentation requirements it is likely to be more

difficult to challenge related party prices than it is in a legal context where

taxpayers are obliged to prepare documentation showing how the transfer

pricing was established.

The OECD transfer pricing guidelines are based on the arm’s length

principle. The 2010 revision of the OECD guidelines maintains this principle as

the international standard to be used for the purpose of calculating transfer

prices (see OECD, 2010). These guidelines provide recommendations for the

application of the arm’s length principle, and cover the selection and use of

different transfer pricing methods, the steps for performing a comparability

analysis and guidance on particular transactions (e.g. transactions relating to

intangibles and management services).

These guidelines have been used by both OECD member countries and

non-member countries to implement binding transfer pricing rules into national

tax laws. There are also countries that refer to and recommend the use of the

OECD guidelines without implementing them into their domestic law (e.g.

Norway). Although broadly accepted, countries differ in their interpretation and

application of the arm’s length principle and transfer pricing rules.

In order to identify and set up the attributes of a transfer pricing

framework, a review of the existing literature was carried out, as well as an

analysis of the transfer pricing guides provided annually by international audit

firms and the IBFD’s Global Transfer Pricing Plus database. For instance, the

main features discussed in most of the reports by PricewaterhouseCoopers

(PwC) are the statutory rules (which include documentation requirements), legal

cases, burden of proof, tax audit procedures, additional tax and penalties, and

resources available to the tax authorities. Moreover, the reports by KPMG also

contain information on whether it is mandatory to provide information

concerning transfer pricing in the taxpayer’s annual tax return.

Under the transfer pricing rules in Europe, the tax authorities carry the

burden of proof when transfer pricing is challenged. Moreover, using the IBFD

121

database to examine, country by country, the methods available to calculate

transfer prices, it was verified that European countries generally allow both

traditional and transactional profit methods. Although the potential interest of

these aspects (i.e. the methods and the burden of proof) is acknowledged, they

are not taken into account and are thus not included in the strictness index,

because they do not differ significantly between the countries in the sample.

As mentioned above, the attributes identified are classified according to

two fundamental pillars: regulation and enforcement. Under the heading of

regulation, four attributes were identified, and seven attributes were used to

assess the existing enforcement mechanisms (Table 3.1 lists the attributes).

Table 3.1

Characterization of a Transfer Pricing Framework

Note: The attributes are used ti classify a country’s transfer pricing framework. The pillars under which the attributes are organized are transfer pricing regulations and enforcement mechanisms. The strictness index is constructed based on the attributes listed.

The first two attributes used for the index relate to statutory transfer pricing

rules. Specifically, the first attribute judges whether or not the national tax law

Statutory rules

Statutory rules stating general transfer pricing principlesStatutory rules providing detailed guidelines on the application of transfer pricing rules

Documentation requirements

Detailed documentation requirementsNo legally required, but in practice tax authorities ask for some form of transfer pricing documentation

Mechanisms to assist enforcementReport information regarding transfer pricing in the annual income tax returnsTax authority with specialized transfer pricing audit teamTax authority performing transfer pricing auditsTax audit procedures specifically for transfer pricing area

Penalty aspects Penalty for failure the documentation requirementsPenalty for adjustments on taxable income on annual tax returnPenalty interest on additional tax as a result of income adjustments

Regulation

Enforcement

122

establishes the arm’s length principle, or an alternative principle regarding

related party transactions, as the basis for determining transfer prices. In 2009,

all the European countries in the sample had already formally established and

were following such a principle. The second attribute concerns whether a

country has issued regulations detailing the application of the arm’s length

principle. European countries differ significantly regarding this attribute, ranging

from those with a total lack of any guidelines on the application of the arm’s

length principle to those with a detailed interpretation of the transfer pricing

rules and instructions on their application.

Furthermore, the OECD recommends the preparation of documentation

containing analyses of related party transactions and calculations of transfer

prices. Therefore, the second set of attributes concerns documentation

requirements or, more precisely, the existence of formal documentation

requirements, and the necessity in practice for documentation even though

there are no statutory requirements in the tax law. The number of countries

requiring companies to disclose appropriate documentation, when requested by

the tax authorities to provide evidence that related party transactions are in

compliance with the arm’s length principle, is increasing. Lohse and Riedel

(2012) noted that there are also European countries with no documentation

requirements, in which the tax authorities are allowed to ask for the relevant

documentation supporting the calculation of prices. For instance, Austrian tax

law does not require formal documentation on transfer pricing, but in practice

the tax authority usually asks for documentation and further information in order

to assess whether the methods used to compute the prices between related

parties comply with the are arm’s length principle.

In order to find a proxy for enforcement mechanisms, the introduction or

the existence of penalties for taxpayers who fail to comply with transfer pricing

rules is considered. The following three types of penalties are considered:

penalties for failure to comply with documentation requirements; penalties for

adjustments to taxable income on the annual tax return; and penalty interest on

additional tax as a result of income adjustments.

Moreover, enforcement is also measured using transfer pricing tax

auditing features. As far as is known, data on tax auditing during the sample

123

period are not disclosed by tax authorities. To circumvent this limitation, the

strategy of using different information that is direct or indirectly related to tax

auditing as a proxy for this was adopted. Therefore, whether there is a

requirement to report information on transfer pricing in the annual income tax

return was considered. This requirement is in force in several countries, with the

mandatory disclosure varying slightly in content. For instance, Italian tax law

requires a company to state whether, during the period, there were intragroup

relations, while in Poland a company has to state whether or not it is obliged to

prepare documentation. This disclosure provides the tax authority with

information that will potentially trigger a tax audit and/or have an impact on the

tax audit strategy.

The remaining three attributes are (a) whether transfer pricing audits are

carried out by the tax authority (or instead this is an aspect covered in the

course of ordinary tax audits); (b) whether there are formal tax audit procedures

specifically for transfer pricing issues; and (c) whether or not the tax authority is

equipped with a specialized transfer pricing team.

When an attribute is in place in a given country and year, it is assigned the

value of one and in the absence of the attribute a zero is allocated. Table 3.2

provides the assigned values for each attribute and country for 2001 and 2009

(Appendix A displays the allocation of the attributes for the period 2002-2008).

The strictness index for each country in the sample is the outcome of the

following expression:

{,= ×�=jj

=|j (1)

where ,= is the ^th attribute of the index for the country and �= is the weighting

of that attribute. To allocate weightings, a survey was carried out with a sample

of transfer pricing experts in several European countries, the details of which

are presented and discussed in the following section. Since the index is a

weighted sum of the attribute values (which are 0 or 1), the higher the value of

the index the stricter the transfer pricing framework in place in the country.

124

Table 3.2

Assigned Attributes in 2001 and 2009

Note: The table displays the allocation of the values 1 and 0 to the attributes by country. The left-hand side of the bar corresponds to the year 2001 and the right-hand side to 2009. The value 1 is assigned when the attribute is in place, and the value 0 otherwise. Source: Data were collected from various transfer pricing guides developed by PwC, KPMG and Ernst & Young, the IBFD’s Global Transfer Pricing Plus database and Lohse et al. (2012).

Attributes

Aus

tria

Bel

gium

Bul

garia

Cro

atia

Cyp

rus

Cze

ch R

.

Den

mar

k

Est

onia

Fin

land

Fra

nce

Ger

man

y

Gre

ece

Hun

gary

Icel

and

Irel

and

Italy

Latv

ia

Lith

uan.

Luxe

mb.

Mal

ta

Net

herl.

Nor

way

Pol

and

Por

tuga

l

Rom

ania

Rus

sia

Slo

vak

R.

Slo

veni

a

Spa

in

Sw

eden

Sw

itzer

l.

Tur

key

UK

Statutory rules: general TP principles 1/1 1/1 1/1 0/1 0/1 1/1 1/1 1/1 1/1 1/1 1/1 1/1 1/1 1/1 1/1 1/1 1/1 0/1 1/1 1/1 1/1 1/1 1/1 1/1 1/1 1/1 1/1 1/1 1/1 1/1 1/1 0/1 1/1

Statutory rules: detailed guidelines on the application of TP rules

0/0 0/1 0/1 0/1 0/0 0/1 0/1 0/1 0/1 0/0 0/1 0/1 0/1 0/0 0/0 1/1 0/1 0/1 0/0 0/0 0/1 0/1 1/1 0/1 0/1 1/1 1/1 0/1 0/1 0/1 0/0 0/1 1/1

Detailed documentation requirements 0/0 0/1 0/0 0/1 0/0 0/0 0/1 0/1 0/1 0/0 0/1 0/1 0/1 0/0 0/0 0/0 0/0 0/1 0/0 0/0 0/1 0/1 1/1 0/1 0/1 0/0 0/1 0/1 0/1 0/1 0/0 0/1 1/1

No legally required, but in practice tax authorities ask for TP documentation

0/1 1/0 0/1 0/0 0/0 1/1 0/0 0/0 0/0 1/1 1/0 1/0 1/0 0/0 1/1 1/1 0/1 1/0 0/1 0/0 0/0 0/0 0/0 0/0 0/0 1/1 0/0 0/0 1/0 1/0 1/1 0/0 0/0

Report information on TP in the annual income tax returns

0/0 0/0 0/0 0/0 0/0 0/0 1/1 0/1 0/1 0/0 0/0 0/1 0/0 0/0 0/0 1/1 0/1 0/1 0/0 0/0 0/1 0/1 1/1 0/1 0/0 0/0 0/1 0/1 0/0 0/0 0/0 0/1 0/0

Tax authority with specialized TP audit team 0/0 0/1 0/0 0/1 0/0 0/0 1/1 0/0 0/0 1/1 1/1 0/0 0/1 0/0 0/0 0/1 0/0 0/0 1/1 0/0 1/1 0/1 0/1 0/1 0/1 0/0 0/1 0/1 0/0 0/1 0/0 0/0 0/1

Tax authority performing TP audits 0/0 0/1 0/0 0/0 0/0 0/0 0/0 0/0 0/0 0/0 0/0 0/0 0/0 0/0 0/0 0/1 0/0 0/0 0/0 0/0 0/0 1/1 0/0 0/0 0/0 0/0 0/0 0/0 0/0 0/0 0/0 0/0 0/1

Tax audit procedures for TP area 0/0 0/1 0/0 0/1 0/0 0/0 0/0 0/0 0/1 1/1 1/1 0/1 0/0 0/0 0/0 0/0 0/0 0/0 0/0 0/0 0/1 0/0 0/0 0/1 0/0 0/0 0/0 0/1 0/1 0/1 0/0 0/0 0/1

Penalty for failure the documentation requirements

0/0 0/0 0/0 0/0 0/0 0/0 0/1 0/1 0/1 1/1 0/1 0/1 0/1 0/0 0/0 0/0 0/0 0/0 0/0 0/0 0/0 0/1 0/0 0/1 0/1 0/0 0/1 0/1 0/1 0/0 0/0 0/1 0/0

Penalty for adjustments on annual tax return 1/1 1/1 0/1 0/0 0/0 1/1 1/1 0/0 1/1 1/1 1/1 1/1 1/1 1/1 0/1 1/1 1/1 0/1 0/0 0/0 0/1 0/1 1/1 1/1 1/0 1/1 0/0 0/1 1/1 1/1 0/1 0/1 1/1

Penalty interest on additional tax 1/1 1/1 1/1 0/0 1/1 1/1 1/1 1/1 1/1 1/1 1/1 0/0 1/1 0/0 0/1 1/1 1/1 1/1 0/1 0/0 0/1 0/1 1/1 1/1 1/1 1/1 0/1 0/1 1/1 0/0 1/1 0/1 1/1

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3.4.2 Assigning weightings to different attributes

The allocation of weightings to the different attributes should reflect the

comparative importance assigned by companies to the attributes. With that aim,

a web survey was performed with a sample of transfer pricing experts from

international audit firms (the Big Four) in 20 European countries (Appendix B

provides the research instrument used for the survey).

The international audit firms provide professional services on transfer

pricing to companies worldwide, and because of that they are equipped with

teams that specialize in transfer pricing. Indeed, these firms have specialist

transfer pricing teams in almost every European country, and so they constitute

an interesting source for the classification of the comparative importance of the

identified attributes. Furthermore, the respondents are experienced

professionals, most of whom are partners or senior partners in their audit firms

(Panel B of Table 3.3 states the job position of the respondents).

The sample chosen was based on the list of experts provided in Ernst &

Young’s ‘2012 Transfer Pricing Global Reference Guide’, PwC’s ‘International

Transfer Pricing 2012’, KPMG’s ‘Global Transfer Pricing Review 2012’ and

Deloitte’s ‘2011 Global Transfer Pricing Desktop Reference’. As shown in Panel

A of Table 3.3, the number of specialists surveyed was 105 in total, of whom 30

responded, which represents a response rate of 28.6 per cent.

The survey organized the eleven attributes into four main sections as

follows: statutory rules (2); documentation requirements (2); mechanisms to

assist with enforcement (4); and penalty aspects (3). As discussed above, the

first two sections concern regulation, while the other two relate to legal

enforcement. The transfer pricing experts were asked to use their experience

and expert knowledge to assign each attribute in each section a percentage

value (a total of 100 per cent) according to the comparative importance of that

attribute for compliance with the arm’s length principle (in the statutory rules and

documentation requirement sections) and for effectiveness in enforcing transfer

pricing rules (in the sections on mechanisms to assist with enforcement and

penalty aspects). For instance, in the section covering statutory rules, the

126

experts divided 100 per cent between the two attributes, and they did the same

for the section on documentation requirements, and so on.

Table 3.3

Characterization of the Sample of Transfer Pricing Experts

Note: Panel A displays by country the number of experts to whom the survey was sent (surveyed) and the number of respondents. Panel B provides the job position of the respondents in the respective firms.

In the final question, the respondents were again asked to assign 100 per

cent between the four sections (i.e. statutory rules, documentation, mechanisms

Panel A: Distribution of the surveyed and respondents by country

Surveyed Respondents Surveyed Respondents

Austria 4 2 Lithuania 3 -

Belgium 4 1 Luxembourg 3 1

Bulgaria 3 - Netherlands 4 1

Croatia 3 - Norway 4 -

Czech Rep. 4 2 Poland 2 -

Denmark 4 - Portugal 3 1

Estonia 2 1 Romania 4 2

Finland 3 2 Russia 4 1

France 4 2 Slovak Rep. 3 1

Germany 4 2 Slovenia 2 2

Greece 4 1 Spain 3 -

Hungary 4 - Sweden 4 3

Iceland 1 - Switzerland 4 -

Ireland 4 2 Turkey 4 1

Italy 4 1 UK 4 1

Latvia 2 - Total 105 30

Panel B: Job position of the respondents in the company

Associate 1

Senior 1

Senior manager 3

Partner 16

Senior partner 4

Director 3

No answered 2

Total 30

Job positionNo. of

respondents

Number of By country, number ofCountries Countries

127

to assist with enforcement and penalty aspects) according to the comparative

importance of each one. The results of the survey are displayed in Table 3.4.

Table 3.4

Survey Results and Weighting Calculation

Note: The survey participants were transfer pricing experts from international audit firms in Europe. For each section, the surveyed experts were asked to assign percentage points (totaling 100 per cent) to the attributes according to their comparative importance. The respondents also assigned values totaling 100 per cent between the four sections, according to the perceived important importance of each feature in a transfer pricing framework. The Mean column shows the means of the responses and the Weighting is the mean of each attribute multiplied by the percentage attached to the respective section.

The Mean column of Table 3.4 shows the means of the percentages

allocated to each section and attribute. In the statutory rules section, the

respondents attach 60.7 per cent to the general statement of the arm’s length

principle, whereas they assign higher importance to the detailed documentation

requirements as an effective way of ensuring compliance with the arm’s length

principle.

Attributes and Sections Mean (%) Weighting (%)

1 Statutory rules 27.671.1 Statutory rules stating general transfer pricing principles 60.70 16.79

1.2 Statutory rules providing detailed guidelines on the application of transfer pricing rules

39.30 10.88

2 Documentation requirements 29.172.1 Detailed documentation requirements 72.63 21.182.2 No legally requirement, but in practice tax authorities ask for

some form of transfer pricing documentation27.37 7.99

3 Mechanisms to assist enforcement 22.003.1 Report information regarding transfer pricing in the annual

income tax returns13.87 3.05

3.2 Tax authority with specialized transfer pricing audit team 33.90 7.46

3.3 Tax authority performing transfer pricing audits 32.67 7.193.4 Tax audit procedures specifically for transfer pricing area 19.56 4.304 Penalty aspects 21.16

4.1 Penalty for failure the documentation requirements 15.17 3.214.2 Penalty for adjustments on taxable income on annual tax

return52.67 11.14

4.3 Penalty interest on additional tax as a result of income adjustments

32.16 6.81

Total - 100

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Table 3.5

Strictness Index by Country and Year

Note: The index comprises the attributes discussed in section 3.4.1. After allocating values of 1 and 0 to each attribute by year and country, each attribute was weighted. The index is the weighted sum of the attributes.

Regarding the importance of each section, the respondents allocate more

importance to the documentation requirements (i.e. 29.17 per cent) than to the

mechanisms to assist with enforcement (22 per cent). The weightings attached

to the regulation and enforcement sections are, respectively, 56.8 per cent and

Country 2001 2002 2003 2004 2005 2006 2007 2008 2009

Austria 0,3475 0,3475 0,3475 0,3475 0,4273 0,4273 0,4273 0,4273 0,4273Belgium 0,4273 0,4273 0,4273 0,5361 0,6106 0,6106 0,8576 0,8576 0,8576Bulgaria 0,2360 0,2360 0,2360 0,2360 0,2360 0,4246 0,4246 0,5361 0,5361Croatia 0,0000 0,0000 0,0000 0,0000 0,5631 0,5631 0,5631 0,5631 0,6061Cyprus 0,0681 0,0681 0,2360 0,2360 0,2360 0,2360 0,2360 0,2360 0,2360Czech Republic 0,4273 0,4273 0,4273 0,5361 0,5361 0,5361 0,5361 0,5361 0,5361Denmark 0,4526 0,5613 0,5613 0,5613 0,5613 0,8053 0,8053 0,8053 0,8053Estonia 0,2360 0,2360 0,2360 0,2360 0,2360 0,2360 0,6192 0,6192 0,6192Finland 0,3475 0,3475 0,4273 0,4273 0,4273 0,4273 0,7432 0,7432 0,7737France 0,5770 0,5770 0,5770 0,5770 0,5770 0,5770 0,5770 0,5770 0,5770Germany 0,5449 0,5449 0,6770 0,7091 0,7091 0,7091 0,7091 0,8178 0,8178Greece 0,3592 0,3592 0,3592 0,3592 0,3592 0,3592 0,3592 0,7056 0,7056Hungary 0,4273 0,4273 0,5593 0,5915 0,5915 0,5915 0,7002 0,7748 0,7748Iceland 0,2794 0,2794 0,2794 0,2794 0,2794 0,2794 0,2794 0,2794 0,2794Ireland 0,2478 0,4273 0,4273 0,4273 0,4273 0,4273 0,4273 0,4273 0,4273Italy 0,5666 0,6384 0,6384 0,6384 0,7130 0,7130 0,7130 0,7130 0,7130Latvia 0,3475 0,3475 0,3475 0,3475 0,3475 0,5666 0,5666 0,5666 0,5666Lithuania 0,1479 0,3158 0,3158 0,6681 0,6986 0,6986 0,6986 0,6986 0,6986Luxembourg 0,2425 0,2425 0,2425 0,2425 0,3223 0,3223 0,3904 0,3904 0,3904Malta 0,1679 0,1679 0,1679 0,1679 0,1679 0,1679 0,1679 0,1679 0,1679Netherlands 0,2425 0,7732 0,7732 0,8162 0,8162 0,8162 0,8162 0,8162 0,8162Norway 0,2398 0,4194 0,4194 0,4992 0,4992 0,5738 0,5738 0,8771 0,8771Poland 0,6986 0,6986 0,7732 0,7732 0,7732 0,7732 0,7732 0,7732 0,7732Portugal 0,3475 0,7732 0,7732 0,8053 0,8053 0,8053 0,8053 0,8053 0,8483Romania 0,3475 0,3475 0,4273 0,5361 0,5361 0,4246 0,5887 0,6633 0,6633Russia 0,5361 0,5361 0,5361 0,5361 0,5361 0,5361 0,5361 0,5361 0,5361Slovak Republic 0,2767 0,2767 0,2767 0,3448 0,4246 0,4246 0,4246 0,4246 0,6938Slovenia 0,1679 0,2425 0,2425 0,2856 0,6061 0,6061 0,8483 0,8483 0,8483Spain 0,4273 0,4273 0,4273 0,4273 0,4273 0,5593 0,7111 0,7111 0,7432Sweden 0,3592 0,3592 0,3592 0,4338 0,4338 0,4338 0,7176 0,7176 0,7176Switzerland 0,3158 0,3158 0,4273 0,4273 0,4273 0,4273 0,4273 0,4273 0,4273Turkey 0,0000 0,0000 0,0000 0,0000 0,0000 0,0000 0,5511 0,7307 0,7307United Kingdom 0,6681 0,6681 0,8576 0,6780 0,6780 0,6780 0,8576 0,8576 0,8576

129

43.2 per cent. The Weightings column is the global importance given to each

attribute, and the figures were obtained by multiplying the mean of each

attribute and the mean of the respective section (i.e. 16.79 = 27.67 × 60.7,

10.88 = 39.3 × 27.67, and so on). The transfer pricing strictness index by

country and year is presented in Table 3.5.

The higher the index, the stricter the legal transfer pricing framework.

From Table 3.5, an overall increase in the strictness of transfer pricing

frameworks over the sample period can be observed in some countries, namely

Lithuania, Norway, Portugal, Slovenia and Turkey. The strictness indices across

all the countries in 2001 and 2009 are, respectively, 0.34 and 0.64 on average.

The Netherlands, Poland, the United Kingdom, Portugal and Germany have the

strictest transfer pricing frameworks on average, while a more ‘lax’ legal

framework in 2009 is observed in Malta, Cyprus, Iceland, Luxembourg, Austria,

Ireland and Switzerland.

The next sections characterize the sample of companies and discuss the

empirical strategy employed.

3.5 The data

The hypothesis is examined using firm-level data for foreign subsidiaries

located in European countries. The data are from the Bureau van Dijk’s

Amadeus database. This database provides financial accounting statements for

national and multinational companies in Europe.

The sample frame comprises foreign companies located in 24 European

Union countries plus Switzerland, Iceland, Croatia and Norway. The observation

units of the analysis are the European foreign subsidiaries. A subsidiary enters

the sample if there is a European multinational located in another country that

owns at least 50 per cent of the subsidiary’s capital. The sample period is 2001

to 2009. For a subsidiary to be included, it must also provide accounting

information on earnings before taxes (EBT), fixed assets and the cost of

employees. Table 3.6 displays the number of observations by host and home

country.

130

Table 3.6

Distribution of Foreign Subsidiaries

Note: The table displays by host country the distribution of foreign subsidiaries and the location of the corresponding parent companies. Source: Amadeus database.

by host country by home countryAustria 803 1,219Belgium 1,292 1,390Bulgaria 228 0Croatia 359 16Cyprus 0 80Czech Republic 2,134 54Denmark 748 1,178Estonia 356 10Finland 678 948France 2,611 3,400Germany 2,180 5,824Greece 0 63Hungary 645 34Iceland 7 19Ireland 213 268Italy 2,007 1,743Latvia 16 10Lithuania 0 6Luxembourg 170 480Malta 5 1Netherlands 627 2,764Norway 968 443Poland 2,495 56Portugal 577 82Romania 1,416 0Russia 0 18Slovak Republic 557 27Slovenia 231 80Spain 2,360 747Sweden 1,078 1,885Switzerland 3 2,778Turkey 0 12United Kingdom 2,514 1,643Total 27,278 27,278

CountryNumber of subsidiaries

131

There are parent companies that own more than one subsidiary in the

same host country. Although the difference in tax rates between the parent

company’s country and the host country (i.e. the tax rate differential) is the

same to all subsidiaries, the two or more subsidiaries may give different

opportunities to shift income as a result of differences in their scales of

operation and ownership structure. Hence, each subsidiary is entered in the

sample on its own rather than being aggregated at a country level.

The aim of this research is to assess the extent to which a more stringent

transfer pricing framework plays a role in deterring profit-shifting activities. To

this end, the incentive for profit shifting is captured using the STR differential.

Specifically, the STR differential is determined by subtracting from the host

country’s corporate tax rate the mean value of the tax rates in the remaining

companies, including the parent company, of the multinational group, i.e.

q�� − q~�� (the next section provides further details and discussion).

Table 3.7 presents the descriptive statistics for the full sample and those

for two subsamples that are created according to whether the tax rate

differential is positive or negative. The analysis comprises 132,809 firm-years

corresponding to a sample of 27,278 foreign subsidiaries. There are 65,529

firm-years for the subsample with an STR differential greater than zero, and

67,280 firm-years for the subsample with a tax differential equal to or less than

zero. For the full sample, the mean of the tax rate differential is -0.8 per cent,

and the strictness index is 0.613, ranging from 0 (laxer framework) to 0.877

(stricter framework).

3.6 Empirical strategy

The hypothesis suggests that the introduction and tightening of a legal transfer

pricing framework can act as a deterrent to cross-border profit-shifting activities.

Accordingly, the analysis is based on regressions of the following form:

/,�:^:3�=" = Fi + Fj(,h1^GG=" + Fk(2_f��^��:+��=" + F�(,h1^GG="× (2_f��^��:+�� + �>=" + n= + o" + p=" (2)

132

Table 3.7


Note: The table shows the descriptive statistics for the full sample of foreign subsidiaries (Panel A), for the subsample of subsidiaries for which the computed tax rate difference is positive (Panel B) and for the subsample for which the tax rate difference is equal to zero or is negative. The earnings before taxes, earnings before interest and taxes, fixed assets, cost of employees, GDP, and GDPpc variables are log-transformed.

where the variable /,�:^:3� is the EBT of the ^th foreign subsidiary in year �. The index intentionally does not account for the existence of thin-capitalization

Panel A: Full sample


Earnings before taxes 132,809 6.467 2.130 0 17.532Earnings before interest and taxes 122,030 6.559 1.976 0 17.519Fixed Assets 132,809 6.870 2.761 0 18.250Cost of Employees 132,809 7.398 1.832 0 17.060Statutory tax rate difference 132,809 -0.008 0.063 -0.244 0.289Strictness Index 132,809 0.613 0.161 0 0.877GDP 132,809 12.965 1.328 8.479 14.721GDP per capita 132,809 9.980 0.376 8.613 11.135

Panel B: Firms' subsample with tax rate difference above zero


Earnings before taxes 65,529 6.736 2.156 0 15.884Earnings before interest and taxes 60,363 6.792 1.998 0 15.064Fixed Assets 65,529 7.184 2.791 0 17.926Cost of Employees 65,529 7.818 1.774 0 17.060

Statutory tax rate difference 65,529 0.042 0.032 1.49e-08 0.289Strictness Index 65,529 0.629 0.143 0 0.877GDP 65,529 13.684 0.980 8.479 14.721GDP per capita 65,529 10.138 0.200 8.613 11.135

Panel C: Firms' subsample with tax rate difference equal or below zero


Earnings before taxes 67,280 6.206 2.071 0 17.532Earnings before interest and taxes 61,667 6.330 1.927 0 17.519Fixed Assets 67,280 6.563 2.696 0 18.250

Cost of Employees 67,280 6.988 1.794 0 14.873Statutory tax rate difference 67,280 -0.057 0.046 -0.244 0Strictness Index 67,280 0.597 0.176 0 0.877GDP 67,280 12.264 1.246 8.850 14.721GDP per capita 67,280 9.827 0.438 8.613 11.135

133

rules. Therefore earnings before interest and taxes (EBIT) is also suitable, and

this variable is taken alternatively as the dependent variable. The use of EBT

remains convenient as the number of observations is higher. These variables

were logarithm-transformed because of their skewed distributions.

The incentive for profit shifting between countries is associated with

differences between the host and the home countries’ corporate tax rates.

Moreover, multinational companies owning more than one foreign subsidiary

have additional opportunities and incentives to shift paper profits, as these

activities can be carried out between subsidiaries (e.g. Huizinga and Laeven,

2008). Therefore, the tax rate difference, denoted in the model by (,h1^GG, is

determined by subtracting from the host country’s tax rate the mean value of the

corporate tax rates in the countries of the parent and other foreign subsidiaries.

The statutory corporate tax rates consist are the combined central and

local STR on distributed profits, and were collected from the OECD tax

database and various corporate tax guides developed by Ernst & Young and

KPMG. The incentive for shifting profits out of a subsidiary’s country increases

with higher tax rate differences, and thus a negative coefficient for the (,h1^GG

variable is predicted.

As discussed above, the implementation and tightening of transfer pricing

rules and enforcement mechanisms determines the transfer pricing strictness of

a country. Based on the implementation stage for each country, an index for the

strictness of transfer pricing by year was built, and is denoted by (2_f��^��:+��

in the model: the higher the index, the stricter the country’s framework and

consequently the higher the costs of shifting income. The hypothesis predicts

that profit-shifting activities decrease as a result of a more stringent transfer

pricing framework. Hence, the coefficient of the two-way interaction between

(,h1^GG and (2_f��^��:+��, F�, is expected to be positive.

The coefficient Fk captures the effects of transfer pricing strictness on the

profits reported by subsidiaries with a tax rate difference equal to zero. The

incentives arising from a zero tax rate differential for profit shifting out of and

into the subsidiary are similar. The effect of transfer pricing strictness will thus

depend crucially on whether the subsidiary plays a role within the group as a

134

recipient of profits. If it does, a stringent transfer pricing framework will reduce

the reported earnings (i.e. Fk < 0), and, if not, the amount of profit shifting out of

the subsidiary will decrease as the cost of shifting increases, leading to an

increase in reported earnings (i.e. Fk > 0). Consequently, the sign of the

coefficient is difficult to predict.

The empirical strategy also incorporates a set of variables to control for

firm and country characteristics. The vector > consists of time-varying control

variables with an associated vector of coefficients ω. The firm’s fixed assets and

cost of employees are taken as proxies of the capital and the labour factor

inputs respectively. Another determinant of earnings is productivity, for which

the proxy of GDP per capita was used. Additionally, a full set of one-digit NACE

industry-year fixed effects is included to capture time-constant heterogeneous

productivity.

To account for the market size, the usual GDP is introduced. Moreover,

the model takes into account subsidiary fixed effects, which allow to control for

subsidiary time-constant unobserved heterogeneity (n=), and also a full set of

year dummies o" to pick up shocks over time that are common to all

subsidiaries.

3.7 Empirical results

To assess the impact of a tightening of the transfer pricing framework on profit-

shifting activities, the tax rate differential, to capture the incentive for profit-

shifting activities, and the strictness index, which is a proxy for the costs of

shifting profits were used.

3.7.1 Baseline results

One of the premises of this essay is that a country’s transfer pricing strictness

measure should include not only the introduction of transfer pricing regulations

but also the enforcement mechanisms in place as time goes on. There are

several examples where regulations are not introduced at the time as the

135

enforcement system. Also, countries differ in their approach to enforcing

transfer pricing rules. Therefore, the inclusion of a set of enforcement attributes

in the strictness measure is expected to improve the accuracy of the

assessment of countries’ transfer pricing frameworks. This is one of the

contributions of this research to the increase in knowledge about the effect of

transfer pricing frameworks on income shifting.

In order to make an empirical assessment of the relevance of including

both regulation and enforcement attributes, specifications of the model are

explored that use the non-weighted sum of the two sets of attributes. Table 3.8

provides estimates using separately non-weighted sums of the regulation

attributes and the enforcement attributes.

The 8&:_.+^3ℎ�+�_)+3 variable consists of the non-weighted sum of all

attributes identified as being part of the regulation dimension (those attributes

listed in sections 1 and 2 of Table 3.4) and the 8&:_.+^3ℎ�+�_/:G variable

comprises all attributes identified as relating to enforcement (sections 3 and 4 of

Table 3.4). The dependent variable in regressions 1-3 is EBT while regressions

4-6 take EBIT. For all specifications, the standard errors are robust and are

clustered at foreign subsidiary level.

In regressions 1-3 of Table 3.8, the estimated coefficients of the tax rate

differential range from -1.2 to -1.8, with significance at the 1 per cent level. The

interaction variable between the tax rate differential and the non-weighted sum

of the regulation attributes (regression 1) enters with a positive coefficient but is

not statistically significant, while the coefficient of the interaction between the

tax rate differential and the non-weighted sum of the enforcement attributes

(regression 2) is 0.293, which is significant at the 1 per cent level of

significance. Regression 3 uses non-weighted sums of both the regulation and

the enforcement attributes, and again the estimated coefficient of the interaction

variable between the tax rate differential and the enforcement attribute is

statistically significant.

136

Table 3.8

Effect of Non-Weighted Sums of Regulation and Enforcement Attributes

Note: The estimation is by a fixed effects linear regression model where the dependent variables are, in regressions 1-3, the subsidiary’s EBT and, in regressions 4-6, its EBIT. The transfer pricing strictness approach consists of the non-weighted sums of regulation attributes and enforcement attributes. The estimation considers both firm-specific fixed effects and time-fixed effects. Standard errors are reported in parentheses after clustering by foreign subsidiary. The lower part of the table indicates the number of observations and subsidiaries and the adjusted within R-squared. *** denotes significance at 1%, ** significance at 5% and * significance at 10%.

When the EBIT variable is introduced instead of EBT (regressions 4-6 of

Table 3.8), the results become more consistent with our expectations. The

inclusion of the non-weighted regulation and enforcement attribute variables

separately (regressions 4 and 5) yield, as expected, positive and highly

significant coefficients for the interaction variables. When both variables enter

(1) (2) (3) (4) (5) (6)

-1.236*** -1.736*** -1.807*** -1.579*** -1.325*** -1.942***

(0.312) (0.264) (0.345) (0.284) (0.238) (0.312)

0.013 0.021** -0.009 -0.002

(0.010) (0.011) (0.010) (0.010)

-0.014** -0.018*** -0.014*** -0.015***

(0.006) (0.006) (0.005) (0.005)

0.180 0.069 0.419*** 0.358***

(0.124) (0.129) (0.113) (0.119)

0.293*** 0.281*** 0.242*** 0.176***

(0.069) (0.071) (0.063) (0.065)

0.074*** 0.073*** 0.073*** 0.067*** 0.066*** 0.066***

(0.006) (0.006) (0.006) (0.006) (0.006) (0.006)

0.434*** 0.435*** 0.435*** 0.526*** 0.525*** 0.526***

(0.014) (0.014) (0.014) (0.014) (0.014) (0.014)

-0.207*** -0.299*** -0.298*** -0.345*** -0.431*** -0.404***

(0.069) (0.070) (0.070) (0.063) (0.063) (0.064)

0.720*** 0.890*** 0.847*** 0.857*** 0.914*** 0.936***

(0.120) (0.120) (0.122) (0.107) (0.107) (0.109)

-1.945** -2.388*** -2.021** -1.898*** -1.352* -1.914***

(0.800) (0.796) (0.819) (0.716) (0.717) (0.737)

Number of observations 132,809 132,809 132,809 127,180 127,180 127,180

Number of subsidiaries 27,278 27,278 27,278 25,857 25,857 25,857

.11 .11 .11 .12 .12 .13

GDP

GDPpc

Constant

Non_Weighted_Enf

Non_Weighted_Reg

TaxDiff x Non_Weighted_Reg

TaxDiff x Non_Weighted_Enf

Dependent Var.: lnEBIT

Tax rate difference

Variables

Fixed assets

Labour compensation

Dependent Var.: lnEBT

Within)k

137

together in regression 6, the estimated tax rate differential coefficient is -1.942.

The interaction variable between the tax differential and the non-weighted

regulation attributes yields an estimated coefficient of 0.358, which is

statistically significant at any level. In turn, the estimated coefficient for the

interaction variable involving the non-weighted enforcement attributes is 0.176,

which is also significant at the 1 per cent level. These estimates support the

assumed relevance of considering the enforcement dimension in the

construction of strictness measure for the countries’ transfer pricing.

To assess the impact of a tightening of the transfer pricing framework on

profit-shifting activities, the following estimates made use of the weighted

strictness index, which is a proxy for the costs of shifting profits, and, as earlier,

the tax rate differential to capture the incentive for profit-shifting activities. The

baseline results are displayed in Table 3.9.

For all specifications, the empirical strategy relies on subsidiary fixed

effects and includes a full set of time-fixed effects. Some of the specifications

also incorporate a full set of one-digit NACE industry-year fixed effects.

Regressions 1 and 4 of Table 3.9 provide estimates for the model without

considering the strictness index. In regression 1, the sensitivity of EBT to the tax

differential yields a coefficient of -0.850 with significance at the 1 per cent level.

This estimate resembles the predicted tax semi-elasticity in the meta-analysis

by Heckemeyer and Overesch (2013). When EBIT replaces the EBT variable,

the estimated coefficient of the tax rate differential falls to 0.605 but remains

highly significant.

Regression 2 in Table 3.9 includes the strictness index, yielding a

coefficient for the tax rate difference of -1.652. The estimated coefficient of the

interaction variable between the weighted index and the tax rate difference is

1.427, which, as predicted by the hypothesis, is positive and significant at the 1

per cent level. At the mean of the sample regressors, when the strictness

indices are 0 and 0.613 (sample mean), the semi-elasticities of the tax rate

difference are -1.652 and -0.777 respectively. When industry-year dummies are

also included, the estimates fall slightly but remain qualitatively similar to the

previous regressions (regression 3).

138

Table 3.9

Impact of Transfer Pricing Strictness on Profit-Shifting Activities

Note: The estimation is undertaken using a fixed effects linear regression model where the dependent variables are, in regressions 1-3, the subsidiary’s EBT and, in regressions 4-6, its EBIT. The estimation considers both firm-specific fixed effects and time-fixed effects. Standard errors are reported in parentheses after clustering by foreign subsidiary. The lower part of the table indicates whether the full set of one-digit NACE industry-year fixed effects was considered, the number of observations and subsidiaries and the adjusted within R-squared. *** denotes significance at 1%, ** significance at 5% and * significance at 10%.

Regressions 4-6 in Table 3.9 replace the dependent variable with EBIT.

The estimated interaction variable when industry-year dummies are included is

1.567, which is significant at any conventional level. In regression 5, the semi-

elasticities of the tax rate difference at the mean of the sample regressors are -

1.522 and -0.512 when the indices are 0 and 0.613 respectively. These

estimates indicate that when the tax rate difference increases by 1 percentage

point, the reported profits decrease by about 1.52 per cent in countries with a

strictness index equal to 0, whereas the decrease would be 0.51 per cent in a

country with a sample mean strictness index.

139

These baseline results suggest that more stringent transfer pricing rules

and the legal enforcement of these rules in the host country leads to an

increase in the taxable income reported by the subsidiary firms.

3.7.2 Robustness checks

To assess the sensitivity of the above results, this section provides several

robustness checks. In the first set of sensitivity analyses, a distinct set of tax

rate differentials is tested. The previous results consider the difference between

the corporate tax rate in the host country and the mean tax rate of the other

members of the multinational group (including the parent company country).

In Table 3.10, the above tax rate differential is replaced with alternative

measures of the incentive for profit shifting, as follows: the commonly used tax

difference between the host and home country tax rates, where only profit

shifting between the subsidiary and the parent company is considered

(regression 2); the difference between the host country’s tax rate and the mean

value of the other tax rates in other host countries where the parent company

holds subsidiaries (excluding the home country’s tax rate) (regression 3); and

the tax rate difference between the host country’s tax rate and the lowest tax

rate in the group (regression 4).

The dependent variable in Table 3.10 is EBIT, and regression 1 replicates

the preceding specification in column 6 of Table 3.9. All the specifications

incorporate a full set of industry-year fixed effects. The estimated coefficients for

the two-way interaction in all specifications are positive and significant, although

regression 4 yields an estimated coefficient that is only significant at the 10 per

cent level. The estimates using EBT as the dependent variable are qualitatively

similar to those just discussed (Appendix C provides these estimates).

The robustness of the baseline results to the strictness index is now

evaluated. In the second part of the sensitivity analysis, the transfer pricing

strictness is approached taking a non-weighted index that includes all the

attributes (i.e. the non-weighted sum of all attributes) (regression 1) and a non-

140

Table 3.10

Robustness Checks I

Note: The estimation is undertaken using a fixed effects linear regression model, where the dependent variable is the subsidiary’s EBIT. Column 1 replicates column 6 of Table 3.9. The estimation considers both firm-fixed effects and a full set of one-digit NACE industry-year fixed effects. Standard errors are reported in parentheses after clustering by foreign subsidiary. The lower part of the table indicates the number of observations and subsidiaries and the adjusted within R-squared. *** denotes significance at 1%, ** significance at 5% and * significance at 10%.

weighted index that uses those attributes from each section that were strobgly

supported (i.e. attributes 1.1, 2.1, 3.2, 3.3, 4.2 and 4.3 listed in Table 3.4)

(regression 2). The tax rate differential employed is the one used in the baseline

results. Table 3.11 provides the regression results, with both EBT and EBIT

used as dependent variables.

The estimated coefficients of the tax rate differential are negative and

statistically significant in all specifications. In regression 3 of Table 3.11, the

interaction variable between the tax rate differential and the non-weighted index

is 0.228, which is positive and statistically significant. When the non-weighted

141

Table 3.11

Robustness Checks II

Note: The estimation uses a fixed effects linear regression model, where the dependent variables are, in regressions 1-2, the subsidiary’s EBT and, in regressions 3-4, its EBIT. Regressions 1 and 3 approach the transfer pricing strictness by a non-weighted index that includes all of the attributes, and regressions 2 and 4 by a non-weighted index that includes the strongly supported attributes from each section (attributes 1.1, 2.1, 3.2, 3.3, 4.2 and 4.3 listed in Table 3.4). The estimation considers both firm-specific fixed effects and time-fixed effects. Standard errors are reported in parentheses after clustering by foreign subsidiary. The lower part of the table indicates the number of observations and subsidiaries and the adjusted within R-squared. *** denotes significance at 1%, ** significance at 5% and * significance at 10%.

index of all attributes is replaced by the non-weighted index using selected

attributes for each section, the estimated coefficient of the interaction variable

falls to 0.188 but still has the expected sign and is significant at any

conventional significance level. The estimates are qualitatively similar when

EBT is used as the dependent variable (regressions 1 and 2).

(1) (2) (3) (4)

-1.936*** -1.705*** -1.829*** -1.297***

(0.328) (0.330) (0.295) (0.296)

-0.006 -0.000 -0.011*** -0.004

(0.004) (0.007) (0.004) (0.006)

0.201*** 0.228*** 0.228*** 0.188***

(0.054) (0.077) (0.049) (0.070)

0.074*** 0.074*** 0.066*** 0.067***

(0.006) (0.006) (0.006) (0.006)

0.435*** 0.434*** 0.526*** 0.525***

(0.014) (0.014) (0.014) (0.014)

-0.257*** -0.248*** -0.414*** -0.392***

(0.070) (0.070) (0.063) (0.063)

0.873*** 0.816*** 0.959*** 0.854***

(0.120) (0.120) (0.107) (0.107)

-2.770*** -2.338*** -2.003*** -1.289*

(0.795) (0.793) (0.716) (0.715)



.11 .11 .13 .12

Constant

Tax rate difference

Non_Weighted_Index

TaxDiff x Non_Weighted_Index

Fixed assets

Labour compensation

Dependent Var.: lnEBT Dependent Var.: lnEBTVariables

GDP

GDPpc

Within)k

142

The interaction variable coefficients in these specifications are more

difficult to interpret because of the scale that is used, but it is possible to confirm

that the signs of the coefficients for the variables of interest remain unchanged.

This indicates that the estimates are consistent with those presented and

discussed in the subsection dealing with our baseline results.

Finally, in the third set of robustness checks, the sensitivity of the previous

estimates to the strictness index used in the study is again assessed. It is

reasonable to expect that multinational companies face higher shifting costs in

the country out of which their profits are shifted. Conversely, in the countries

that benefit from profit shifting the same high level of scrutiny of profit-shifting

activities is not expected, as governments attempt to increase their own tax

collections. Therefore, further tests are undertaken that take into account the

expected direction of income shifting (for a similar strategy, see e.g. Collins et

al., 1998; Klassen and Laplante, 2012). This approach gives rise to two different

subsamples (q�� − q~�� > 0 and q�� − q~�� ≤ 0), for which the

strictness index is predicted to have different impacts. Regarding the first

subsample, which constitutes the test group, there is an incentive to shift profits

out of the foreign subsidiary. For the other subsample, taken as the control

group, the incentive is potentially to shift profits into the subsidiary; thus the

transfer pricing strictness framework of the subsidiary’s country can be

predicted to have a lower impact for this subsample.

This alternative strategy enables to examine the impact of the strictness of

the host country’s transfer pricing framework when the direction of shifting is out

of the host country, and to compare this with the effect of the same index for a

subsample of companies which potentially benefit from the shifting of profits.

Table 3.12 reports the regression results.

143

Table 3.12

Robustness Checks III

Note: The estimation is undertaken using a fixed effects linear regression model, where the dependent variables are the subsidiary’s EBT (regressions 1-3) and its EBIT (regressions 4-6). Columns 1 and 4 replicate, respectively, columns 3 and 6 of Table 3.9. The sample was divided based on whether the tax rate differential is greater than zero or equal to or less than zero. The estimation considers both firm-specific fixed effects and a full set of one-digit NACE industry-year fixed effects. Standard errors are reported in parentheses after clustering by foreign subsidiary. The lower part of the table indicates the number of observations and subsidiaries and the adjusted within R-squared. *** denotes significance at 1%, ** significance at 5% and * significance at 10%.

As in the previous estimates, the standard errors reported in brackets are

clustered at the subsidiary level. Regression 1 replicates the estimates of the

baseline specifications in column 3 of Table 3.9. As previously discussed, for

the full sample in regression 1 the sensitivity of taxable income to tax

differentials falls significantly when the host country’s transfer pricing strictness

index increases. The sample is then divided into two subsamples based on

whether q�� > q~�� (regression 2) or q�� ≤ q~�� (regression 3).

144

In regressions 2 and 3 of Table 3.12, the estimated coefficients for the tax

rate differential variable are negative and significant, indicating that in both

cases an increase in, say, the host country’s tax rate (resulting in a more

positive tax rate difference), leads to a statistically significant decrease in the

subsidiary’s reported profits.

The estimated coefficient of the two-way interaction for the subsample of

companies for which it is expected that the index will exert a lower effect is -

0.305, which is not significant at any conventional level. In turn, for the

subsample of companies with incentives to shift profits abroad, the estimated

coefficient is 2.89, which is positive as predicted, but only significant at the 10

per cent level.

Regressions 4-6 use the subsidiary’s EBIT as the dependent variable.

Regression 4 reproduces the estimates of the baseline specifications in column

6 of Table 3.9. For all specifications, the tax rate difference is again negative.

As in regression 1, the estimated coefficient for the interaction variable when

the full sample is taken into account is positive and significant at the 1 per cent

level. The coefficient of the same variable for the subsample q�� > q~��

is 3.096, which is now significant at the 5 per cent level. At the sample mean of

the regressors, the tax difference semi-elasticities are -2.580 and -0.541 when

the strictness indices are 0 and 0.629 (index subsample mean) respectively.

These estimates indicate that the stricter the transfer pricing framework, the

lower the sensitivity of EBIT to tax rate differentials. For the other subsample

(regression 6), the interaction variable coefficient is, as predicted, not

statistically different from zero.

Putting the baseline and robustness tests together, the estimates strongly

suggest that the introduction and tightening of a transfer pricing framework

dampens profit-shifting activities within multinational companies.

145

3.8 Conclusions

This essay provides evidence of the effect of the strictness of transfer pricing

frameworks on profit-shifting activities. To do this, an index was developed

which relies on the transfer pricing rules and the enforcement mechanisms in

effect in a set of European countries, and their evolution over the period 2001-

2009.

This study contributes to the existing literature in several ways. First, the

essay defines and develops a country-level measure for transfer pricing

strictness using a weighted index. Second, the essay examines the

effectiveness of transfer pricing frameworks; there is a lack of research on this

in the existing literature. Finally, the empirical measure used takes into account

not only the attributes associated with transfer pricing rules, but also the

implementation of mechanisms to enforce taxpayers’ compliance with those

rules, extending the current literature on the effect of transfer pricing

frameworks on profit-shifting activities.

Using a sample of 27,278 foreign subsidiaries in Europe over a period in

which there were significant changes to transfer pricing frameworks, the essay

investigates the extent to which the introduction of a tightened transfer pricing

framework implied a decrease in profit-shifting activities. The interaction

between profit-shifting incentives and the strictness index indicates that the

stricter the transfer pricing framework of the host country, the lower the profit-

shifting activities. The results are robust to an alternative proxy for profit shifting,

as well as to the transfer pricing framework strictness measure. It appears that

the costs arising from a more stringent transfer pricing framework are capable

of dissuading, albeit only partially, multinational companies from shifting taxable

income abroad.

147

Appendix A: Allocation of the attributes in 2002

Attributes

Aus

tria

Bel

gium

Bul

garia

Cro

atia

Cyp

rus

Cze

ch R

.

Den

mar

k

Est

onia

Fin

land

Fra

nce

Ger

man

y

Gre

ece

Hun

gary

Icel

and

Irel

and

Italy

Latv

ia

Lith

uan.

Luxe

mb.

Mal

ta

Net

herl.

Nor

way

Pol

and

Por

tuga

l

Rom

ania

Rus

sia

Slo

vak

R.

Slo

veni

a

Spa

in

Sw

eden

Sw

itzer

l.

Tur

key

UK

Statutory rules: general TP principles 1 1 1 0 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 0 1


0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 1 0 0 0 0 1 0 1 1 0 1 1 0 0 0 0 0 1

Detailed documentation requirements 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 1 1 0 0 0 0 0 0 0 0 1


0 1 0 0 0 1 0 0 0 1 1 1 1 0 1 1 0 1 0 0 0 0 0 0 0 1 0 0 1 1 1 0 0


0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 1 0 0 0 0 1 0 1 1 0 0 0 0 0 0 0 0 0

Tax authority with specialized TP audit team 0 0 0 0 0 0 1 0 0 1 1 0 0 0 0 0 0 0 1 0 1 0 0 1 0 0 0 1 0 0 0 0 0

Tax authority performing TP audits 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0 0 0

Tax audit procedures for TP area 0 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0


0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Penalty for adjustments on annual tax return 1 1 0 0 0 1 1 0 1 1 1 1 1 1 1 1 1 0 0 0 1 1 1 1 1 1 0 0 1 1 0 0 1

Penalty interest on additional tax 1 1 1 0 1 1 1 1 1 1 1 0 1 0 1 1 1 1 0 0 1 1 1 1 1 1 0 0 1 0 1 0 1

148


Attributes

Aus

tria

Bel

gium

Bul

garia

Cro

atia

Cyp

rus

Cze

ch R

.

Den

mar

k

Est

onia

Fin

land

Fra

nce

Ger

man

y

Gre

ece

Hun

gary

Icel

and

Irel

and

Italy

Latv

ia

Lith

uan.

Luxe

mb.

Mal

ta

Net

herl.

Nor

way

Pol

and

Por

tuga

l

Rom

ania

Rus

sia

Slo

vak

R.

Slo

veni

a

Spa

in

Sw

eden

Sw

itzer

l.

Tur

key

UK



0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 1 0 0 0 0 1 0 1 1 0 1 1 0 0 0 0 0 1



0 1 0 0 0 1 0 0 1 1 0 1 0 0 1 1 0 1 0 0 0 0 0 0 1 1 0 0 1 1 1 0 0


0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 1 0 0 0 0 1 0 1 1 0 0 0 0 0 0 0 0 0





0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0



149


Attributes

Aus

tria

Bel

gium

Bul

garia

Cro

atia

Cyp

rus

Cze

ch R

.

Den

mar

k

Est

onia

Fin

land

Fra

nce

Ger

man

y

Gre

ece

Hun

gary

Icel

and

Irel

and

Italy

Latv

ia

Lith

uan.

Luxe

mb.

Mal

ta

Net

herl.

Nor

way

Pol

and

Por

tuga

l

Rom

ania

Rus

sia

Slo

vak

R.

Slo

veni

a

Spa

in

Sw

eden

Sw

itzer

l.

Tur

key

UK



0 1 0 0 0 1 1 0 0 0 0 0 0 0 0 1 0 1 0 0 1 0 1 1 1 1 1 0 0 0 0 0 1



0 1 0 0 0 1 0 0 1 1 0 1 0 0 1 1 0 0 0 0 0 1 0 0 1 1 0 0 1 1 1 0 0


0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 1 0 0 0 0 1 0 1 1 0 0 0 0 0 0 0 0 0





0 0 0 0 0 0 0 0 0 1 1 0 1 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0



150


Attributes

Aus

tria

Bel

gium

Bul

garia

Cro

atia

Cyp

rus

Cze

ch R

.

Den

mar

k

Est

onia

Fin

land

Fra

nce

Ger

man

y

Gre

ece

Hun

gary

Icel

and

Irel

and

Italy

Latv

ia

Lith

uan.

Luxe

mb.

Mal

ta

Net

herl.

Nor

way

Pol

and

Por

tuga

l

Rom

ania

Rus

sia

Slo

vak

R.

Slo

veni

a

Spa

in

Sw

eden

Sw

itzer

l.

Tur

key

UK



0 1 0 1 0 1 1 0 0 0 0 0 0 0 0 1 0 1 0 0 1 0 1 1 1 1 1 1 0 0 0 0 1



1 1 0 0 0 1 0 0 1 1 0 1 0 0 1 1 0 0 1 0 0 1 0 0 1 1 1 0 1 1 1 0 0


0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 1 0 1 0 0 1 0 1 1 0 0 0 0 0 0 0 0 0





0 0 0 0 0 0 0 0 0 1 1 0 1 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0



151


Attributes

Aus

tria

Bel

gium

Bul

garia

Cro

atia

Cyp

rus

Cze

ch R

.

Den

mar

k

Est

onia

Fin

land

Fra

nce

Ger

man

y

Gre

ece

Hun

gary

Icel

and

Irel

and

Italy

Latv

ia

Lith

uan.

Luxe

mb.

Mal

ta

Net

herl.

Nor

way

Pol

and

Por

tuga

l

Rom

ania

Rus

sia

Slo

vak

R.

Slo

veni

a

Spa

in

Sw

eden

Sw

itzer

l.

Tur

key

UK



0 1 1 1 0 1 1 0 0 0 0 0 0 0 0 1 1 1 0 0 1 0 1 1 1 1 1 1 0 0 0 0 1



1 1 1 0 0 1 0 0 1 1 0 1 0 0 1 1 1 0 1 0 0 1 0 0 1 1 1 0 0 1 1 0 0


0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 1 1 1 0 0 1 0 1 1 0 0 0 0 0 0 0 0 0





0 0 0 0 0 0 1 0 0 1 1 0 1 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0



152


Attributes

Aus

tria

Bel

gium

Bul

garia

Cro

atia

Cyp

rus

Cze

ch R

.

Den

mar

k

Est

onia

Fin

land

Fra

nce

Ger

man

y

Gre

ece

Hun

gary

Icel

and

Irel

and

Italy

Latv

ia

Lith

uan.

Luxe

mb.

Mal

ta

Net

herl.

Nor

way

Pol

and

Por

tuga

l

Rom

ania

Rus

sia

Slo

vak

R.

Slo

veni

a

Spa

in

Sw

eden

Sw

itzer

l.

Tur

key

UK



0 1 1 1 0 1 1 1 1 0 0 0 1 0 0 1 1 1 0 0 1 0 1 1 1 1 1 1 1 1 0 1 1



1 0 1 0 0 1 0 0 0 1 0 1 0 0 1 1 1 0 1 0 0 1 0 0 0 1 1 0 0 0 1 0 0


0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 1 1 1 0 0 1 0 1 1 0 0 0 1 0 0 0 1 0





0 0 0 0 0 0 1 1 1 1 1 0 1 0 0 0 0 0 0 0 0 0 0 1 1 0 0 1 0 0 0 1 0



153


Note: This appendix displays the allocation of the values 1 and 0 to the attributes by country from 2002-2008. The attributes assignment for the first and the last year of the sample period is provided in the body of the essay (Table 3.2). The value 1 is assigned when the attribute is in place, and the value 0 otherwise. Source: Data were collected from various transfer pricing guides developed by PwC, KPMG and Ernst & Young, the IBFD’s Global Transfer Pricing Plus database and Lohse et al. (2012).

Attributes

Aus

tria

Bel

gium

Bul

garia

Cro

atia

Cyp

rus

Cze

ch R

.

Den

mar

k

Est

onia

Fin

land

Fra

nce

Ger

man

y

Gre

ece

Hun

gary

Icel

and

Irel

and

Italy

Latv

ia

Lith

uan.

Luxe

mb.

Mal

ta

Net

herl.

Nor

way

Pol

and

Por

tuga

l

Rom

ania

Rus

sia

Slo

vak

R.

Slo

veni

a

Spa

in

Sw

eden

Sw

itzer

l.

Tur

key

UK



0 1 1 1 0 1 1 1 1 0 1 1 1 0 0 1 1 1 0 0 1 1 1 1 1 1 1 1 1 1 0 1 1



1 0 1 0 0 1 0 0 0 1 0 0 0 0 1 1 1 0 1 0 0 0 0 0 0 1 1 0 0 0 1 0 0


0 0 0 0 0 0 1 1 0 0 0 1 0 0 0 1 1 1 0 0 1 1 1 1 0 0 0 1 0 0 0 1 0





0 0 0 0 0 0 1 1 1 1 1 1 1 0 0 0 0 0 0 0 0 1 0 1 1 0 0 1 0 0 0 1 0



155

Appendix B: Research instrument used for the survey

157

Appendix C: Impact of the strictness index using alternative tax rate differentials (using EBT varia ble)

Note: The estimation is undertaken using a fixed-effects linear regression model where the dependent variable is the subsidiary’s EBT. Column 1 replicates column 3 of Table 3.9. The estimation considers both firm-specific fixed effects and a full set of one-digit NACE industry-year fixed effects. Standard errors are reported in parentheses after clustering by foreign subsidiary. The lower part of the table indicates the number of observations and subsidiaries and the adjusted within R-squared. *** denotes significance at 1%, ** significance at 5% and * significance at 10%.

159

Acknowledgements

I am grateful to the survey participants who took their valuable time to

participate in this study. I am also indebted to the following professionals who

provided me with helpful information on the transfer pricing framework of

various European countries; from Portuguese Tax Authority: Luis Pedro Ramos

and Paulo Macedo; from Ernst & Young: Aggelos Benos, Alexander Milcev,

Aristofanis Sakarellos-Tousis, Danny Oosterhoff, Denes Szabo, Evgenia Vetter,

Filip Yonov, Franck Berger, Gunter Oszwald, Ilona Butane, Kennet Pettersson,

Leonas Lingis, Libor Fryzek, Lucijan Klemencic, Marko Starcevic, Oliver

Wehnert, Ozlem Guc, Sypros Kaminaris, Valdis Leikus, Zoltan Liptak, and from

Advokatfirmaet BA-HR DA: Joachim Bjerke. Finally, acknowledgements are

also due to the Editors of Accounting and Business Research and two

anonymous referees for their suggestions on a previous version of this essay.

References

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multinational firms. NBER working paper 12493, National Bureau of Economic

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Blouin, J., Robinson, L. and Seidman, J. (2011). Coordination of transfer prices

on intra-firm trade. Proceedings Tax research symposium XII, University of

Illinois at Urbana-Champaign.

Buettner, T. and Wamser, G. (2013). Internal debt and multinational profit

shifting: empirical evidence from firm-level panel data. National Tax Journal, 66,

63-93.

Buettner, T., Overesch, M., Schreiber, U. and Wamser, G. (2012). The impact

of thin-capitalization rules on the capital structure of multinational firms. Journal

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Clausing, K. (2003). Tax-motivated transfer pricing and US intrafirm trade

prices. Journal of Public Economics, 87, 2207-2223.

Collins, J., Kemsley, D. and Lang, M. (1998). Cross-jurisdictional income

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profit: A survey of empirical evidence. Working paper 07/02, Oxford University

Centre for Business Taxation.

Ernst & Young (2003). Transfer pricing 2003 global survey: practices,

perceptions and trends in 22 countries plus tax authority approaches in 44

countries. Available at: http://webapp01.ey.com.pl/EYP/WEB/eycom_

download.nsf/resources/Transfer%20Pricing%20Survey%20Report_2003.pdf/$

FILE/Transfer%20Pricing%20Survey%20Report_2003.pdf, accessed 25 March

2013.

Ernst & Young (2009). Global transfer pricing survey: tax authorities insights:

perspectives, interpretations and regulatory changes. Available at:

http://www.ey.com/GL/en/Services/Tax/2009-Global-Transfer-Pricing-survey,

accessed 17 May 2013.

Ernst & Young. Transfer pricing global reference guide 2003, 2005, 2006, 2007,

2008, 2009.

Heckemeyer, J. and Overesch, M. (2013). Multinationals’ profit response to tax

differentials: Effect size and shifting channels. Discussion paper 13-045, ZEW

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Huizinga, H., and Laeven, L. (2008). International profit shifting within

multinationals: A multi-country perspective. Journal of Public Economics, 92,

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Klassen K. and Laplante, S. (2012). Are U.S. multinational corporations

becoming more aggressive income shifters? Journal of Accounting Research,

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KPMG. Global transfer pricing services: 2012 Global transfer pricing review by

country. Available at: http://www.kpmg.com/Global/en/IssuesAndInsights/

ArticlesPublications, accessed 08 April 2013.

Lohse, T. and Riedel, N. (2012). The impact of transfer pricing regulations on

profit shifting within European multinationals. FZID Discussion paper 61-2012,

Econstor.

Lohse, T. and Riedel, N. and Spengel, C. (2012). The increasing importance of

transfer pricing regulations - A worldwide overview. Working paper 12/27,

Oxford University Centre for Business Taxation.

OECD (2010). Tranfer pricing guidelines for multinational enterprises and tax

administrations. July 2010. OECD publications.

Overesch, M. and Wamser G. (2010). Corporate tax planning and thin-

capitalization rules: evidence from a quasi-experiment. Applied Economics, 42,

563-573.

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Ruf, M. and Weichenrieder, A. (2012). The taxation of passive foreign

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Simmons, R. (2003). An empirical study of the impact of corporate taxation on

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Swenson, D. (2001). Tax reforms and evidence of transfer pricing. National Tax

Journal, 54, 7-25.

Conclusions

165

Countries compete for firms, capital and profits. Corporate taxation influences

multinational companies’ decisions regarding their investment and profits. Some

of the effects lead to inefficiencies in resources allocation as well as losses in

national tax revenues. Countries worldwide, with the purpose of attracting and

facilitating foreign investment and reducing the undesirable effects of corporate

taxation, have been engaged in international tax coordination. Additionally,

governments have been playing an active role by setting anti-tax-avoidance

measures in order to dampen international tax avoidance.

This doctoral thesis addressed the impact of corporate taxation on

business behaviour at different decision levels in the context of tax coordination

as well as of anti-tax-avoidance measures.

Using a panel research design, it firstly assessed the tax treaty effects on

investment location decisions. After employing a traditional fixed-effects

negative binomial model and following the current discussion in the literature

claiming that this model only controls for firm fixed effects in a very specific set,

a score test was used as well as an alternative econometric procedure to fit

models with high-dimensional fixed effects. This methodological approach is

new in the particular field of tax treaty effects and is one of the main

contributions of the essay to the empirical literature. Furthermore, an effective

tax rate, which mirrors specific tax treaty features, was proposed and tested,

enabling the control of the confounding effects associated with the use of a

single binary variable. Overall, the major contribution of this study is that the

obtained evidence challenges the verdict that tax treaties have either an

inconsiderable or a negative effect on foreign investment.

Secondly, under the European Commission’s CCCTB directive proposal,

the current profit-shifting strategies will become obsolete. The second essay

evaluated empirically the relationship between the responsiveness of the scale

of investment to the host country’s corporate taxation and the international

profit-shifting activities, to shed more light on whether eliminating tax-planning

activities will introduce additional tax distortions to the level of investment. This

research contributes to the discussion of the CCCTB implications from a distinct

perspective and thus it is relevant from the fiscal policy perspective. Moreover,

166

the examination of the above-mentioned relationship has been conducted in

very high-tax or very low-tax settings, so this study contributes to the lack of

empirical literature, particularly in the European context.

Finally, the extent to which the introduction and tightening of transfer-

pricing frameworks deter international tax avoidance via transfer-price

manipulation was examined. As far as it is known, there is only one study

directly addressing this research question, despite its importance given the

associated costs for both governments and taxpayers of setting such tax

regulations. As the transfer-pricing framework of a country is difficult to define

because of its intrinsically qualitative nature, a single measure at the country

level was built reflecting the strictness of transfer pricing by means of a

weighted index. The weightings of the index were obtained by conducting a

survey on a sample of European transfer-pricing experts from international audit

companies. The research approach used is new and it is the major contribution

of this study to the empirical literature. Another contribution of this study is that

the strictness index relies not only on regulations but also on the existence of

mechanisms to enforce taxpayers’ compliance with the rules.

The analysis was carried out using a comprehensive accounting database.

The database provides information on European foreign subsidiaries, which

were the observation units over the three essays. There was the concern of

building the econometric models based on the existing literature in order to

avoid the omission of relevant variables, however, the behaviour of foreign

subsidiaries is complex to model, as it is also highly determined by unobserved

characteristics (e.g. human resources and management characteristics). Using

panel data, such unobserved time-invariant variables as well as observed time-

constant variables could be controlled by additionally including firm-specific

fixed effects in the econometric models. This estimation strategy, along with the

inclusion of time fixed effects, allowed more accurate and unbiased estimations

to be obtained.

Overall, it was found that corporate taxation (particularly from the host

country) plays a role in the location and scale of investment decisions.

Furthermore, international tax rate differences explain multinational companies’

decisions regarding profit reallocation. These findings confirm that tax

167

considerations exert significant effects on the second, third and fourth levels of

Devereux and Griffith’s decision tree.

Moreover, bilateral tax treaty formation appears to have a positive impact

on foreign investment, specifically on the location decision of foreign

subsidiaries. Country-pairs implementing a bilateral tax treaty, registered an

increase in the number of foreign subsidiaries of about 27 per cent, which

corresponds to 1 additional foreign subsidiary. This increase is economically

relevant given the sample mean of foreign subsidiaries.

The analysed relation between international profit-shifting activities and

the tax responsiveness of foreign investment suggests that the level of foreign

investment of the labelled ‘shifter’ companies is less sensitive to the host

country’s corporate taxation compared with ‘non-shifter’ companies. This finding

suggests a negative relation between the tax responsiveness of foreign

investment scale and profit shifting. Hence, eliminating profit-shifting activities,

which will arise with the implementation of the European Commission’s CCCTB

system, is expected to imply additional tax distortions on the scale of foreign

investment.

In the last essay, the results indicate that tightening transfer-pricing rules

and enforcement mechanisms dampens, albeit partially, profit shifting from

higher- to lower-tax countries. This finding, along with previous studies

assessing the impact of other anti-tax-avoidance measures, is particularly

interesting from a fiscal policy perspective as it tends to confirm that such

legislative measures are an effective mechanism to deter harmful tax planning.

Overall, this thesis shows that legislative initiatives, specifically regarding

transfer-pricing regulation, are effective in dampening tax avoidance strategies.

Moreover, the suggested inverse relationship between the level of investment

sensitivity to taxation and profit shifting indicates that more caution is necessary

in the implementation of the CCCTB model. Further discussion and research on

the implications of the CCCTB model are needed in order to improve the

formula apportionment system and to clarify which additional measures should

be implemented to mitigate the predictable additional tax distortions identified in

this thesis.

168

Beyond the above-mentioned urge for more studies regarding the

European Commission’s CCCTB proposal, further research is desirable and

expected on the effects of tax treaty formation on business behaviour. More

precisely, although there is anecdotal evidence pointing out that multinational

companies use treaty shopping in order to minimize their tax burden, there is

lack of empirical evidence on whether or not tax evasion decreases with the

implementation of tax treaties, as claimed by OECD model convention itself.

The implementation of the European Commission’s directives is likely to

have facilitated profit-shifting activities as they reduced the cost of shifting and

income became internationally more mobile. Furthermore, throughout the last

decade the strictness of transfer pricing frameworks in Europe have increased.

A suggestion for future research would be to analyse the extent to which the

latter legislative initiatives overcome the increased opportunities for shifting

produced by directives. This assessment has already been initiated in a new

study, which is not part of this thesis.

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