Abstract In this paper, we describe the evolution of effective tax rates (ETR) of Finnish corporate groups and firms over time. Using detailed corporate tax return data from 2000–2015, we document a decreasing trend in effective tax rates over time, particularly for Finnish-headquartered multinational enterprises. We do not observe a significant decreasing trend for domestic firms, consistent with a broad tax base and limited means of tax avoidance. Complementing our results with unconditional quantile regression, we also observe heterogeneity in the time trend across the ETR distribution. Finally, we link multinational enterprises to their foreign subsidiaries and find that multinationals with tax haven subsidiaries report zero taxable profits more often than non-haven affiliated ones.
Audits and letters are two of the enforcement strategies available to a tax administration to ensure compliance. In this paper, we use a unique set of experiments to determine which of the two enforcement strategies is more effective. We use firm-level data from 1,974 randomized audits and 8,000 information letters. We find that audits result in an immediate and significant increase in firms' payroll tax remittance, whereas letters have a weaker effect. Updated, perceived audit probability seems to sustain adjustments in payroll tax remittance two years post-treatment (on-site audit or standardized, electronic information letters). Firms receiving the information letters also adjust their remittance upwards, and more so when the letters are actually read. Our “back of the envelope” cost-benefit calculations suggest that tax administrations could save resources by partially switching to cheaper enforcement strategies, like information letters.
Aggressive tax planning (ATP) does not have any legal definition or any other precise and established definition. Nor is it intended here to define precisely ATP. Instead, the primary purpose is to create a more general reference framework for aggressive tax planning after the base erosion and profit shifting (BEPS) project of the OECD and G20 countries. Some situations or means of ATP have been left outside the scope of the BEPS project. In some cases, various occurrences of ATP are not covered by the implemented regulation, that is, the regulation can be considered underinclusive. Further, some of the proposed means are such that even though precise regulation has been targeted at these situations, the regulation has been implemented in such a way that its ultimate purpose can be circumvented. Finally, various ATP methods can rely on the fact that different states have not fully implemented the BEPS recommendations. The proposed framework can serve as a tool and incentive for both current and future tax policy discussions. Locating concrete ATP activities in the reference framework also illustrates for whom it would be possible and with what kind of legislative means to intervene in such phenomena.
Abstract We examine the effect of compliance frictions in reclaiming foreign withholding taxes on Foreign Portfolio Investments (FPI) using a comprehensive panel of FPI stocks of 83 countries, including EU Member States, between 2005 and 2019 and country-pair specific withholding tax rates. We find a negative and statistically significant elasticity of the FPI stock of equity and debt holdings to “overwithheld” withholding taxes. The estimated elasticities imply that a 1 percentage point reduction in “overwithheld” withholding taxes increases the FPI stock of equity holdings by 1.5%. In a second step, we employ a general equilibrium model to quantify the macroeconomic implications of compliance frictions. In absence of costs in the withholding tax refund process, average GDP in the EU countries would increase by 0.26% (equivalent to EUR 46 billion in 2024), while capital and wages would rise by 0.72% and 0.26%, respectively, suggesting noticeable macroeconomic costs arising from such compliance frictions.
Abstract In a dual income tax (DIT) system, labor income is taxed progressively, while capital income is subject to a lower proportional tax. DIT systems were introduced in Sweden, Norway, and Finland in the early 1990s. In the absence of rules restricting capital income distributions, owners of closely held corporations would easily be able to circumvent the progressive tax on earned income by withdrawing an appropriate amount of dividends instead of wages. The Nordic countries adopted very different income splitting models, with immediate implications for the tax treatment of dividends. In this article, I first review the principles of the income splitting rules of Sweden, Norway, and Finland. I then discuss some of the trade-offs involved in the design of such rules.
