Assessing tax relief from targeted investment tax incentives through corporate effective tax rates

doi:10.1787/3eaddf88-en

Cited by 3 publications

(7 citation statements)

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“…A higher cost of capital affects investment negatively, all else being equal (Frank and Shen, 2016[19]; Kim, 2020 [20]; Carluccio, Mazet-Sonilhac and Mésonnier, 2021 [21]). However, while investment has been subdued in recent years, the main determinants of the cost of capital, i.e.…”

Section: The Falling Cost Of Capital Has Supported Business Investmentmentioning

confidence: 99%

“…Certain firm characteristics can influence a firm's investment behaviour. They typically include cash flows, profitability and the firm-specific cost of capital (Frank and Shen, 2016[19]; Carluccio, Mazet-Sonilhac and Mésonnier, 2021 [21]), financial constraints (Kalemli-Özcan, Laeven and Moreno, 2022 [29]), and the share of intangible capital (Crouzet and Eberly, 2019 [25]). This section analyses differences in investment trends across several of these firm characteristics based on firm-level data from Orbis (Annex D).…”

Section: Investment Has Been Subdued In Most Sectors But There Is Imp...mentioning

confidence: 99%

“…Forward-looking ETR indicators were built for the purpose of this analysis following the OECD methodology (OECD, 2022 [31]; Hanappi, 2018 [27]), itself derived from the theoretical model developed by Devereux and Griffith (2003[32]), and relying on publicly available information on country-specific corporate tax parameters including from (Spengel et EMTR indicators are sensitive to the tax provisions included in the calculations. In particular, tax provisions to reduce the debt-equity bias, such as the Allowance for Corporate Equity (ACE), 21 tend to affect the EMTRs significantly. Their modelling differs across sources.…”

Section: Baseline Empirical Framework To Analyse the Tax Sensitivity ...mentioning

confidence: 99%

“…24 This sensitivity is significantly weaker in the most recent period of the sample (Table 1, columns 4 and 8). 21 An ACE system aims at equating the treatment of debt-financed and equity-financed investment by allowing the deduction of a notional interest rate on equity to match the deduction of interest payments on debt. 22 A 5-percentage point increase in the EMTR is associated with a lower investment rate by 5 × 0.0208 = 0.104 percentage point in the short term and 5 × (0.0208 1 − 0.512 ⁄ ) = 0.213 percentage point in the long term.…”

Section: Business Investment Is Sensitive To Corporate Tax But Its Se...mentioning

confidence: 99%

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How does corporate taxation affect business investment?

2023

OECD Economics Department Working Papers

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Business investment in OECD countries has remained weak, in particular since the 2008 global financial crisis. At the same time, the cost of capital has significantly and steadily decreased over the last thirty years, reflecting a fall in both interest rates and corporate tax rates. This raises the question of whether business investment still responds to the cost of capital and thus whether corporate tax policy can support investment. This paper analyses trends in business investment and in the cost of capital in OECD countries over the past three decades. Then, it investigates empirically the sensitivity of business investment to corporate taxation, and how this sensitivity varies across firm, investment and tax-design characteristics. Panel regressions at the firm and industry levels confirm that business investment rates are negatively related to corporate taxation, measured by country-level forward-looking effective tax rates. However, the tax sensitivity of business investment has fallen significantly since the global financial crisis. It also differs significantly across firms, assets, and corporate tax design characteristics. Overall, the estimation results suggest that a nuanced and granular approach to corporate tax policy, accounting for heterogeneity in tax sensitivity, is needed to support investment effectively. The paper discusses possible policy options, including the reduction of non-profit taxes, the use of targeted corporate income tax instruments, and the use of more generous capital allowances where they may induce strong investment responses.

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Section: The Falling Cost Of Capital Has Supported Business Investmentmentioning

confidence: 99%

Section: Investment Has Been Subdued In Most Sectors But There Is Imp...mentioning

confidence: 99%

Section: Baseline Empirical Framework To Analyse the Tax Sensitivity ...mentioning

confidence: 99%

Section: Business Investment Is Sensitive To Corporate Tax But Its Se...mentioning

confidence: 99%

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How does corporate taxation affect business investment?

2023

OECD Economics Department Working Papers

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“…R&D tax incentives have also been increasingly used over the past two decades (González Cabral et al, 2023 [26]; OECD, 2023 [70]). There is a large body of evidence that tax incentives can deliver very low ETRs (Botman, Klemm and Baqir, 2008 [71]; González Cabral, Appelt and Hanappi, 2021 [72]; Celani, Dressler and Hanappi, 2022 [73]; Egger, Strecker and Zoller-Rydzek, 2020 [28]).…”

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confidence: 99%

The Global Minimum Tax and the taxation of MNE profit

2024

OECD Taxation Working Papers

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The Global Minimum Tax (GMT) introduces significant changes to the international tax architecture and thereby to the taxation of large multinational enterprises. This paper assesses the impact of the GMT using new and unique data on MNE worldwide activity building on comprehensive estimates of global low-taxed profit.The paper has four main findings. First, the GMT reduces the incentives to shift profits, resulting in an estimated fall in global shifted profits by around half. Second, the GMT will reduce low-taxed profit worldwide through reduced profit shifting and top-up taxation. The global amount of MNE profit taxed below the 15% minimum effective rate is estimated to fall by more than two thirds. Third, the GMT is estimated to increase CIT revenues by USD 155-192 billion per year, or between 6.5-8.1% of current global CIT revenues. The distribution of these gains across jurisdictions strongly depends on the implementation choices of governments. Finally, the GMT is estimated to reduce tax rate differentials across jurisdictions. This could have potentially important impacts on the efficiency of the global allocation of investment and economic activity.

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Corporate Effective Tax Rates in Latin America and the Caribbean

Hanappi,

Nieto Parra,

Orozco

et al. 2023

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Using a methodology developed by the Organisation for Economic Co-operation and Development (OECD), this paper estimates forward-looking effective tax rates on corporate income for 21 Latin American and Caribbean (LAC) countries. When compared with countries in other regions, the results show that effective average and marginal tax rates on corporate income in LAC countries tend to be high, with several countries ranked among those with the highest effective tax rates in the large sample. This is mainly due to relatively high corporate income tax (CIT) statutory rates and tax provisions that are less generous than those observed in other jurisdictions (e.g., allowances for corporate equity, half-year conventions, inventory valuation methods). Results also show that there is wide heterogeneity of effective tax rates across LAC countries and across asset categories, pointing toward non-neutralities in the CIT system, which do not always seem to be intended or justified by the existence of market failures. In addition, ETRs were also increased by the macroeconomic context over the period 20172021, as LAC countries had higher real interest and inflation rates. These results indicate that there is ample space for reforming CIT systems in LAC to improve their neutrality.

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Assessing tax relief from targeted investment tax incentives through corporate effective tax rates

Abstract: This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area.

Cited by 3 publications

References 21 publications

How does corporate taxation affect business investment?

How does corporate taxation affect business investment?

The Global Minimum Tax and the taxation of MNE profit

Corporate Effective Tax Rates in Latin America and the Caribbean

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