Changes in the Effective Average Corporate Income Tax Rates in Europe

Effective average corporate income taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. rates are informative as they reflect the overall tax burden on businesses, a decisive factor for investment decisions. Today’s map shows how these effective tax rates have changed across Europe between 2008 and 2018.

Effective average corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. rates capture not only statutory tax rates but also provisions impacting the tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. . These include, for example, capital allowanceA capital allowance is the amount of capital investment costs, or money directed towards a company’s long-term growth, a business can deduct each year from its revenue via depreciation. These are also sometimes referred to as depreciation allowances. s, inventory valuation methods, international tax ruleInternational tax rules apply to income companies earn from their overseas operations and sales. Tax treaties between countries determine which country collects tax revenue, and anti-avoidance rules are put in place to limit gaps companies use to minimize their global tax burden. s, and the integration of corporate income taxes into individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. es.

Of all 31 countries covered, Hungary (-8.4 percentage-points), Malta (-7.8 percentage-points), and the United Kingdom (-7.4 percentage-points) have seen the most significant decreases in the effective corporate income tax rate between 2008 and 2018.

Greece, Latvia, and Cyprus are the countries with the largest increases in the effective tax rates, at 5.8, 2.9, and 2.4 percentage-points, respectively.

On average, the effective tax rate declined by 1.5 percentage-points between 2008 and 2018 in all countries covered, compared to a 1.7 percentage-point decline in the statutory rate.

Much attention has been paid to declining statutory corporate income tax rates. However, as the following table shows, these cuts in statutory tax rates are not always mirrored by changes in effective tax rates. This is because some countries decide to combine a cut in the corporate tax rate with measures adjusting the corporate tax base (such as changing capital allowances or implementing patent boxes).

Table 1. Effective and Statutory Corporate Income Tax Rates

Sources: EU Tax Database, ZEW Publication, OECD Tax Database
	Effective Average Corporate Income Tax Rate			Statutory Corporate Income Tax Rate
	2008	2018	Percentage-Point Difference 2008 and 2018	2008	2018	Percentage-Point Difference 2008 and 2018
Austria (AT)	23.0%	23.1%	0.1	25.0%	25.0%	0.0
Belgium (BE)	24.9%	24.8%	-0.1	34.0%	29.6%	-4.4
Bulgaria (BG)	8.9%	9.0%	0.1	10.0%	10.0%	0.0
Croatia (HR)	16.5%	14.8%	-1.7	20.0%	18.0%	-2.0
Cyprus (CY)	10.6%	13.0%	2.4	10.0%	12.5%	2.5
Czech Republic (CZ)	18.4%	16.7%	-1.7	21.0%	19.0%	-2.0
Denmark (DK)	22.6%	19.8%	-2.8	25.0%	22.0%	-3.0
Estonia (EE)	16.5%	15.7%	-0.8	21.0%	20.0%	-1.0
Finland (FI)	24.5%	19.6%	-4.9	26.0%	20.0%	-6.0
France (FR)	34.6%	33.4%	-1.2	34.4%	34.4%	0.0
Germany (DE)	28.2%	28.9%	0.7	29.4%	29.9%	0.5
Greece (GR)	21.8%	27.6%	5.8	35.0%	29.0%	-6.0
Hungary (HU)	19.5%	11.1%	-8.4	21.3%	10.8%	-10.5
Ireland (IE)	14.4%	14.1%	-0.3	12.5%	12.5%	0.0
Italy (IT)	27.3%	23.7%	-3.6	31.4%	27.8%	-3.6
Latvia (LV)	13.8%	16.7%	2.9	15.0%	20.0%	5.0
Lithuania (LT)	12.7%	13.6%	0.9	15.0%	15.0%	0.0
Luxembourg (LU)	25.9%	22.8%	-3.1	29.6%	26.0%	-3.6
Malta (MT)	32.2%	24.4%	-7.8	35.0%	35.0%	0.0
Netherlands (NL)	23.1%	22.5%	-0.6	25.5%	25.0%	-0.5
Norway (NO)	26.5%	21.8%	-4.7	28.0%	23.0%	-5.0
Poland (PL)	17.4%	17.5%	0.1	19.0%	19.0%	0.0
Portugal (PT)	23.7%	21.4%	-2.3	26.5%	31.5%	5.0
Romania (RO)	14.8%	14.7%	-0.1	16.0%	16.0%	0.0
Slovakia (SK)	16.8%	18.7%	1.9	19.0%	21.0%	2.0
Slovenia (SI)	20.0%	17.3%	-2.7	22.0%	19.0%	-3.0
Spain (ES)	32.8%	30.1%	-2.7	30.0%	25.0%	-5.0
Sweden (SE)	24.6%	19.4%	-5.2	28.0%	22.0%	-6.0
Switzerland (CH)	18.7%	18.6%	-0.1	21.2%	21.2%	-0.0
Turkey (TR)	18.6%	19.2%	0.6	20.0%	22.0%	2.0
United Kingdom (GB)	28.0%	20.6%	-7.4	28.0%	19.0%	-9.0
Simple Average	21.3%	19.8%	-1.5	23.7%	21.9%	-1.7

In the United Kingdom, for example, the corporate tax rate was cut from 28 percent in 2008 to 19 percent by 2018, a 9 percentage-point decrease. The effective tax rate, however, only declined by 7.4 percentage-points, from 28 percent to 20.6 percent. This discrepancy is partially because the UK broadened its corporate tax base by lowering capital allowances for machinery and industrial buildings, partly offsetting the tax savings from the tax rate cut.

As this example shows, not only changes in statutory tax rates but also measures adjusting the tax base impact the tax burden businesses face. Effective tax rates reflect both and can thus be a more informative measure when analyzing corporate tax reforms.

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