Declining Effective Tax Rates of Multinationals: The Hidden Role of Tax Base Reforms

Jules Ducept and Sarah Godar

No 2117, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: This paper documents the rise of corporate tax-base narrowing measures in the EU using a novel dataset covering both tax rate and tax base reforms implemented between 2014 and 2022. Our findings indicate a shift away from the ’cut rate – broaden base’ approach, as governments increasingly align corporate taxation with industrial policy objectives. We show that EU tax competition exerts downward pressure on high-tax countries, while the likelihood of tax cuts also varies with the political orientation of governments. Using financial accounts from more than 40,000 affiliates, we find that the average effective tax rate of multinational enterprises in the EU has declined more rapidly than the statutory rate and estimate that tax base reforms account for 24% of this decline. The estimated revenue cost of all reforms combined amounts to 3.5% of total corporate tax revenue collected from the sample firms. These revenue losses should be carefully weighed against the anticipated benefits of tax reforms.

Keywords: Effective Tax Rates; Multinationals; Tax Competition; Corporate Income Tax; Tax Reform; Political Orientation; European Union (search for similar items in EconPapers)
JEL-codes: F23 H25 H26 P11 (search for similar items in EconPapers)
Pages: 43 p.
Date: 2025
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