A new study by ZEW Mannheim shows that Germany is still perceived as a high-tax country in global tax competition. The current Mannheim Tax Index shows that the effective average tax burden for profitable investment projects will be 28.5% in 2023 - almost 10% higher than the EU average. Although measures could be taken to improve Germany's position in international comparison, they harbour the risk of considerable tax revenue losses and deadweight effects.
Germany has lost its tax attractiveness
"Due to a lack of major tax reforms in the last 15 years, Germany has become less attractive as a location for corporate investment from a tax perspective compared to its major economic partners. This classification is particularly worrying in light of the overall negative development of economic conditions in Germany," emphasises Julia Spix, researcher in the ZEW Research Department "Corporate Taxation and Public Finance".
Germany's character as a high-tax country is particularly evident in the reduction of the corporate tax rate in France in recent years. The increase in the corporation tax rate in the UK to 25% has not changed Germany's leading position.
Tax cuts are absolutely necessary
Measures currently being discussed to improve the attractiveness of Germany as a business location for tax purposes include more generous depreciation rules for movable assets, the abolition of the solidarity surcharge and a reduction in corporate income tax to 25%.
"Immediate depreciation on movable assets, which has a direct investment-promoting effect, would at least bring Germany into line with its important economic partner, the USA, in the international ranking of the Mannheim Tax Index," emphasises Dr Daniela Steinbrenner, researcher in the ZEW Research Department "Corporate Taxation and Public Finance".
Even the introduction of declining balance depreciation and the abolition of the solidarity surcharge would only slightly reduce the effective tax burden on companies by 0.2% and 0.7% respectively.
"A reduction in corporate taxes to 25% would have the strongest signalling effect, as Germany would position itself in the midfield of Western European investment locations with an effective tax burden of 23.5%. However, the risk of deadweight effects is high here," adds Dr Katharina Nicolay, deputy head of the ZEW Research Department "Corporate Taxation and Public Finance". "Overall, it should be noted that a significant improvement in the attractiveness of tax locations is not possible without considerable short-term tax revenue reductions."
The Mannheim Tax Index
The effective average tax burden at company level is a key decision criterion for multinational corporations when deciding where to locate. The Mannheim Tax Index therefore takes into account the taxes on the profits and capital employed of corporations. The calculations take into account both the tax burden of these taxes as well as the interaction of the various types of tax and the most important regulations for determining the tax base. Examples include the regulations on tax depreciation and amortisation or the valuation of inventories. The index covers a wide range of countries (EU-27, United Kingdom, Switzerland, Norway, USA, Canada, Japan, North Macedonia and Turkey) for the period from 1998 to 2023.
