The Tax Attractiveness Index (T.A.X.) indicates the attractiveness of a country's tax environment and the possibilities of tax planning for companies. The tax attractiveness index is constructed for 100 countries worldwide starting from 2005 on. The index covers 20 equally weighted components of real-world tax systems which are relevant for corporate location decisions. The index ranges between zero and one. The more the index values approaches one, the more attractive is the tax environment of a certain country from a corporate perspective. The 100 countries include 41 European countries, 19 American countries, 6 Caribbean countries, 18 countries that are located in Africa & Middle East, and 16 countries that fall into the Asia-Pacific region.
History The tax attractiveness index was developed by two German economists, Sara Keller and Deborah Schanz. Originally the T.A.X. covered 16 different components of real-world tax systems and the period 2005–2009. The Index was further developed by Andreas Dinkel by adding four more components. The index gets constantly updated for upcoming years. Previous research showed that the T.A.X. has an explanatory power for location decisions of e.g. subsidiaries and patents.
Measurement The Tax Attractiveness Index represents a new approach to measuring the attractiveness of a country's tax environment. To construct the Tax Attractiveness Index, values are added for all 20 tax factors per country, which have been identified as determining a country's tax environment, and divide the sum by 20. Hence, the index represents an equally-weighted sum of 20 tax factors. The Index has the purpose to indicate the attractiveness of a country's tax environment and the opportunities of tax planning. As the components of the T.A.X. are measured on an annual basis, so is the index. To calculate the index, the variables need to be constrained to values ranging between zero and one. In cases quantification schemes had to be developed, the measurement of the respective tax factors has already been adjusted to this scale. A country's tax environment is considered as more attractive, the more the value of the index approaches one. The T.A.X. is an alternative measurement to the statutory tax rate, and can be considered to be a more accurate proxy for a country's tax environment. Many high tax countries, especially in Europe, offer extremely favorable tax conditions. Thus the T.A.X. reflects the tax attractiveness of a country better as single determinants.
Variables
Anti-avoidance rules The tax law of many countries includes provisions aiming at preventing abuse. Tax authorities try to challenge fictitious or artificial transactions and try to combat tax evasion. Transactions which are only carried out to receive a tax benefit shall be prevented. Furthermore, transactions whose primary intention is tax allowance should be prohibited. If a transaction is considered as harmful tax avoidance under an anti-avoidance legislation, the tax burden is calculated as if the abuse had not occurred. As tax planning schemes might not work under certain anti-avoidance rules, it is favorable for companies if such legislations do not exist.
CFC rules Generally the country of residence of subsidiaries is allowed to tax the subsidiaries profits. The country of the parent only taxes profits that are distributed in the form of dividends. This system leaves room for abuses by multinational companies as it can be considered as incentive to transfer income to low taxed countries. Therefore, high tax countries implement controlled foreign corporation (CFC) rules to prevent the erosion of their tax base. If a country has CFC rules the companies have less scope in their tax planning activities.
Corporate income tax rate In association with the tax base the corporate income tax rate is the main component of the corporate tax burden. Consequently, countries offering a lower statutory tax rate are more popular among companies as countries with high statutory tax rates.
Depreciation Important elements of the tax base are tax depreciation rules. The faster companies can depreciate assets, the higher is the present value of the tax savings as the tax base is lowered earlier.
EU member state In the European Union (EU) withholding taxes are reduced by the Parent-Subsidiary Directive as well as the Interest and Royalties Directive for transactions within the EU. As a consequence royalties, interests and dividends might be able to be transferred between two EU member countries without withholding taxes being charged on the level of the source state.
Group taxation regime Countries that offer group taxation, allow that losses of group members are offset against profits of other members of the group. In this way, the tax burden of a corporate group can be reduced. As a result, a group taxation regime is an advantage for companies.
Holding tax climate Holding companies are a central tool in many tax planning strategies of companies. The location decision for holdings depends on multiple general tax factors (such as participation exemption for dividends and capital gains, a wide treaty network, low withholding taxes, a group taxation regime) as well as on specific holding regimes. Certain countries thus try to enhance their tax attractiveness by offering special regimes for holding companies. Special rules for holdings include the exemption from local corporate income tax (e.g. Switzerland), exemption from current taxation (e.g. Luxembourg until 2010), the exemption from tax on all disposals of shares in subsidiaries (e.g. Singapore) or a refund of taxes paid to non-resident shareholders if profits are distributed (e.g. Malta).
Loss carryback Loss Carryback lowers the tax burden of companies. Current losses can be offset against profits of past periods. Loss carryback possibilities are an attractive factor for multinational enterprises.
Loss carryforward Loss Carryforward lowers the future tax burden of companies. Current losses can be offset against profits of future periods. Loss carryforward possibilities are an attractive factor for multinational enterprises.
… excerpt ends here. Continue reading the full article.
