Mannheim Tax Index

Tax Attractiveness in Europe

The Mannheim Tax Index is an indicator for the effective tax levels of companies, as taxation is deemed to be an important location factor. More precisely, it benchmarks countries and regions from a tax perspective, taking into account taxes on profits and invested capital as well as the most important regulations in determining the taxable base. In doing so, it provides a comprehensive picture of taxation by following two general strands: the taxation of domestic companies along with their shareholders and cross-border corporate investments. Analysing the taxation of companies is a traditional way of comparing the fiscal attractiveness of regions competing with one another internationally. It concentrates on the tax rates borne by mobile capital and mobile companies.

Our index is based on effective tax burdens for two reasons: They are more relevant for investment decisions than nominal tax rates, and their aggregate level makes them directly comparable across locations. Looking at these effective tax rates over time provides intuition about common trends in tax competition and possible interdependencies between locations.

Without bringing in reforms, Germany risks losing its tax attractiveness

The coronavirus crisis has hit the global economy hard. The sudden collapse of global transport routes and supply chains has shown how vulnerable globalisation can be especially with regard to the transportation of systemically relevant raw materials and intermediate goods. In the wake of the crisis, there will be a noticeable realignment of company locations and manufacturing bases will be relocated to within close proximity of sales markets. Within the European Single Market, the tax attractiveness of some Member States is a decisive factor when opting for the location of a company.

Germany, one of the most important European countries for foreign direct investment, continues to lose vital ground in terms of international tax competition. When viewed only from a tax perspective, Germany is an unattractive location compared to France, Italy, the United Kingdom and the EU average for companies with foreign investment alternatives. In 2020, France was the only country with an even higher tax burden on traditional business models. However, if the tax reforms announced by direct competitors are taken into account, Germany will soon take the leading position regarding the burden on company profits.

Germany’s effective tax burden is almost ten percentage points higher than the European average

The effective average tax burden of a profitable investment project in Germany stood at 28.9% in 2020 and thus surpassed the EU average by almost ten percentage points. On an international scale, only three of the countries that were looked at (Spain, France and Japan) had a higher tax burden. The tax reform in the USA at the start of 2018 ultimately led to significant tax reliefs on investments which were made there and thereby dipped below the burden rate in Germany for the first time within the last decade. The last major burden reduction in Germany happened more than ten years ago. The basic tax reform in 2008 led to the effective burden on companies in Germany decreasing by almost 7.3 percentage points and has since followed a slightly increasing trend due to developments in trade tax.

Should it be the case that tax reforms fail to materialise, then this could exacerbate the sustained high burden on investments in Germany in the years ahead. It could be possible that Germany reaches the peak of tax burdens in Europe within the next few years if comparable countries continue to actively participate in tax competition. This could deter investors from making new investments in Germany. A stable economic climate is needed to refinance the extensive coronavirus aid package, which in turn requires an attractive investment climate.

A model company and investment project enables country comparisons

The calculation of the Mannheim Tax Index is based on the established investment theory approach by British economists Devereux und Griffith (1999, 2003). By taking into account a number of tax parameters and their effects on a hypothetical future investment, the effective tax burden of a country is calculated and tax-induced distortions in the choice of location are shown. Both the cost of capital and the effective marginal tax rate of a marginal investment, which influences the scope of investment at a certain location, as well as the average effective tax burden on a profitable investment are calculated.
The Graphic “Model structure” shows the structure of investment and its financing. The calculation of the Mannheim Tax Index is based on a corporation in the manufacturing industry, which makes an investment in a specified combination of various assets either through itself or a foreign subsidiary. The hypothetical investment project consists in equal parts of intangible assets, industrial buildings, machines, financial assets and inventory assets. Various forms of financing are also taken into account. Financial sources are, in order of their weighting, retained earnings, borrowed capital and new equity capital.
 

Further information on the Mannheim Tax Index

Please cite the data as:

ZEW (2021), Effective Tax Levels using the Devereux / Griffith methodology – Final Report 2020, Project for the EU Commission TAXUD/2020/DE/308, Mannheim

Access to Data

The calculations for the Mannheim Tax Index are based on the figures of the study series “Effective Tax Levels Using the Devereux/Griffith Methodology” which ZEW conducts on behalf of the European Commission. The aim of this study is to determine effective tax rates for the 27 EU Member States as well as the United Kingdom, Switzerland, Norway, the Republic of Macedonia, Turkey, the USA, Canada and Japan. The calculation of internal and cross-border marginal and average effective tax rates draws upon the approach taken by Devereux and Griffith. The shareholder level is included in addition to the company level. The study outlines the development of effective tax rates for the time frame 1998 to 2020. The information is available for download:

Further data and examinations using the Devereux Griffith model