An Effective Tax System
New tax laws and reporting requirements such as the global minimum tax, country-by-country reporting or sustainability reporting show: the tax world is constantly developing. New regulations bring with new challenges such as increased complexity. With their research in the TRR 266 our researchers contribute to making tax systems as transparent, effective and simple as needed.
Taxes are complex – Do we need a simpler tax system?
Firms as well as individuals contribute to society not only but also by paying taxes. What many think is a simple matter isn’t always the case when you put it into practice. Because taxes and their effects are complex. And tax regulations can be imprecise and opaque. That is why the researchers of the TRR 266 examine the following questions: How do taxes affect business decisions? What are the consequences of unclear tax regulations? How do individuals and firms perceive their own tax burden? How can we design an effective tax system that stimulates the economy and accommodates all stakeholders? Based on their findings, our researchers provide important insights for firms, regulators and politicians.
Tax enforcement and regulation – a driver or barrier for the economy?
Businesses are often confronted with different kinds of taxes, such as corporate, consumption and environmental taxes, which can also vary across country to country. Unclear tax regulations can make this a complex issue and influence a firm’s business decisions. In project B01 „Investment Effects of Multidimensional Taxation“, the researchers are investigating the consequences of a lack of tax transparency for investment decisions and compliance. Do companies invest less when tax regulations are unclear? Do they engage in tax avoidance? And how does it affect employment and a company’s productivity? How do companies manage tax risks? And how do information intermediaries, such as tax advisors, affect tax compliance? Their findings provide important insights for current policy debates on the design of tax regulations.
Tax misperceptions: How transparency can help
Taxes play an important role in decision-making for both individuals and businesses, for example in finance and investment decisions. However, tax information can be complex due to different tax laws and guidelines, causing that tax burdens are often misperceived. Our researchers of project B08 “Tax Burden Transparency” are investigating how tax misperception arises and what consequences it has. For example: How does it affect business decisions? Is there a need for more transparency in the tax system? Does tax policy need to be improved in this respect?
Their research provides important insights for the design of tax regulations and tax laws. One example are regulations deemed to foster investments and economic growth. TRR 266 researchers have repeatedly proposed an extended loss carry-back based on theory and evidence.
Tax complexity: the need for simpler solutions
Global tax systems are constantly facing new challenges due to new regulations, digitalization and global tax competition. These dynamics are driving tax complexity. Tax complexity and the resulting lack of regulatory and administrative transparency are often seen as a major challenge for companies and tax administrations. But tax complexity also offers opportunities for companies and countries. The project A05 „Accounting for Tax Complexity“ examines the evolution of tax complexity over time an across countries and therefore has developed the Tax Complexity Index. This index measures the complexity of a country’s corporate income tax code and framework as faced by multinational companies. They find that multinationals have to deal with increasing levels of tax complexity. However, by 2022 the increase in tax complexity is slowing somewhat. Still, simplification is needed, for example, with the global minimum tax. The TRR 266 researchers proposed a simplification approach that was adopted by the German Bundestag in 2023. However, their findings also show that complexity can have very different effects on different companies and is not necessarily harmful.
Simplification of the global minimum tax: a simple yet viable solution
The introduction of the global minimum tax (GloBE, also known as Pillar Two) leads to criticism by affected firms. The solution: firms should be exempted from filing a GloBE declaration for those countries where it is likely that they easily meet the agreed minimum tax rate via.
Read moreDecoding the black box of corporate tax risk management – what do tax risk experts think?
Due to increased pressure from a variety of sources, the attention around corporate tax risk management has recently grown. While the relation between tax planning and tax risk is well researched, little is known about tax risk management and how it influences tax outcomes,…
Read moreThe Tax Complexity Index – An innovative measure to analyze tax complexity across countries
Recently, the relevance of tax complexity has increased significantly. This is a potential threat for the economy and society since the negative consequences of complex tax systems can jeopardize economic prosperity and encourage undesired tax planning as well as tax avoidance.
Read moreTransparency – the panacea for tax avoidance and sustainability?
Tax avoidance by multinational enterprises has received much public attention, both recently and in the past. Although tax avoidance (as compared to tax evasion) is not necessarily illegal, it raises ethical concerns and has significant consequences for public finances and social equity. Disclosure regulations are supposed to counter tax avoidance activities and ensure that each country receives its fair share of taxes. As part of sustainability reporting, certain companies must also collect and disclose information on environmental, social and governmental aspects.
TRR 266 researchers are investigating how mandatory disclosure regulations and voluntary provision of tax information affect companies in order to provide optimal tax disclosure strategies.
Is more transparency always a good idea?
Stakeholders increasingly voice their desire for transparency about corporate activities. Similarly, fiscal authorities aim to expand disclosure requirements. With private country-by-country reporting, for example, there is a new reporting obligation designed to combat tax avoidance with greater transparency. Multinational companies have to report to their tax authorities certain performance indicators for each country in which they operate, such as sales revenue, profits and income taxes paid. Public country-by-country reporting takes this concept a step further by requiring companies to make this information available to the public. But does greater transparency lead to greater tax fairness? Or does it also have negative effects – e.g. for affected companies? The desire for transparency and interest in a company’s activities can also be seen in the global push for sustainability reporting. In 2019, the Global Reporting Initiative (GRI) has added a section on taxes to its guidelines, making reporting on environmental, social, and governmental (ESG) issues mandatory. Project B06 “Effects of Demand-driven Disclosures in Tax and Sustainability” investigates how this changing information environment for nonfinancial disclosures affects companies’ activities, such as production, location decisions, or ESG investments. Their findings help companies to design optimal tax and sustainability disclosure strategies.
When do companies benefit from sharing information?
By implementing tax reporting obligations like country-by-country reporting governments are increasing the tax transparency requirements for companies. As a result, affected companies are required to share certain tax information with the public. Due to recent economic challenges (the COVID pandemic, the war in Ukraine, and inflation), tax transparency might become even more important, as governments seek to increase their tax revenues.
Disclosure requirements such as country-by-country reporting aim to promote tax compliance and discourage tax avoidance. Stakeholders (e.g. investors) nowadays are also more interested in knowing how companies deal with their tax affairs. Companies might be rewarded for voluntarily sharing this information. But does greater tax transparency deliver on its promises? Or does it have unwanted side effects?
In project B07 „Costs and Benefits of Tax Transparency“, the researchers are investigating the economic effects of mandatory and voluntary tax transparency on companies, their stakeholders and tax reforms. Their insights aim at understanding the interplay between companies’ managerial decisions (e.g., investment decisions or disclosure decisions) and (anticipated) stakeholder responses.
