Annual tax revenue losses in Germany

Profit shifting to countries with particularly low corporate taxes causes the German public sector to miss out on EUR 5.7 billion in revenue each year.

01/20/2021 · Wirtschafts- und Sozialwissenschaften, Raumwissenschaften · ifo Institut Leibniz-Institut für Wirtschaftsforschung an der Universität München e. V. · News · Forschungsergebnis

Profit shifting to countries with particularly low corporate taxes causes the German public sector to miss out on EUR 5.7 billion in revenue each year, estimates the ifo Institute in a study it has now published in ifo Schnelldienst. “For the first time, we have been able to evaluate information from the country-by-country reporting that large multinational companies have had to file with the tax authorities since 2016,” says ifo President Clemens Fuest, one of the co-authors.

The study covers large and smaller German multinational enterprises (MNEs) as well as the German subsidiaries of foreign MNEs. Large multinationals’ new country-by-country reporting shows that only 9 percent of their total global profits are accounted for by subsidiaries based in low-tax countries. Of these profits, the lion’s share remains in Europe; non-European tax havens play only a minor role. “According to our estimates, 62 percent of profits in low-tax countries can be attributed to real economic activity, for example in countries such as Switzerland or Ireland. But 38 percent is the result of profit shifting to avoid taxes. As a result, the German treasury is missing out on annual tax revenue of around EUR 1.6 billion just from large multinationals,” Fuest continues. The same approach was taken when estimating the profits of small multinationals and of German subsidiaries of foreign multinationals.

While the subsidiaries of large German MNEs in high-tax countries generated profits of around EUR 41,000 per employee, the figure was around EUR 130,000 in low-tax European countries and EUR 73,000 in non-European tax havens. These figures show a clear imbalance between the distribution of profits and the distribution of the factors of production (labor and capital). A look at the average profit-tax burden suggests that this imbalance is a consequence of tax structuring. For example, profit taxes in low-tax countries average 10 to 11 percent – just half as high as in countries outside this group.

For the first time, the project used information from country-by-country reporting of the 333 largest German multinational corporations. Published by German multinationals with global sales of at least EUR 750 million, these reports detail the countries in which they operate, the profits their subsidiaries generate there, how much tax those subsidiaries pay, how many people they employ, and the value of their property, plant, and equipment.

Original publication

Clemens Fuest, Felix Hugger, Florian Neumeier
ifo Institut, München, 2021
ifo Schnelldienst, 2021, 74, Nr. 01, 38-42

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