The Use of SME Tax Incentives in the European Union

Abstract

Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW. 1 The Use of SME Tax Incentives in the European UnionSören Martin Bergner*, Rainer Bräutigam**, Maria Theresia Evers**, Christoph Spengel*** January 2017This paper discusses the impact and the appropriateness of tax incentives for small and medium-sized enterprises (SMEs) in the European Union. First, we provide a survey of implemented tax incentives specifically targeted at SMEs in the 28 EU Member States. Building hereon, we measure the impact of these regimes on the effective tax burdens of targeted companies. We find that SME tax incentives are a commonly used measure among European policy makers. The vast majority of regimes, however, only marginally reduce the tax liability of SMEs. If major reliefs are available, they mostly stem from special tax rates whereas tax credits and special allowance play a minor role. In the second main part of the analysis, we examine the arguments potentially justifying the usage of SME tax incentives. As a main result, small firms per se do not create more jobs and innovations nor do they face insurmountable financing constraints. The existence of market failures commonly associated with SMEs -and possibly warranting the use of SME tax incentives -can therefore not be confirmed. Instead, disproportionate tax compliance costs for small entities constitute the most compelling argument for a special tax treatment. These compliance costs can most appropriately be addressed by administrative reliefs. Special tax rates, tax credits and allowances, in contrast, are not only inefficient but also ineffective in this regard. Instead of improving the neutrality of the overall tax system, the latter are likely to add further distortions and unnecessary complexity. Altogether, the focus of policy-makers should thus shift from providing discriminatory incentives to the design of a generally neutral and simple tax system, which would benefit small as well as large enterprises. JEL Classification Code: H24, H25Keywords: SME, Tax Policy, European Union *: University of Mannheim **: ZEW and University of Mannheim ***: University of Mannheim and ZEW Corresponding Author: Sören Martin Bergner, bergner@uni-mannheim.de 2 IntroductionRecently, public discussions on tax policy have mainly centered around profit shifting activities by large, multinational firms. 1 The majority of businesses, however, is made up of small and medium-sized enterprises (SMEs). In the European Union, they account for 99.8% of all businesses and 67% of total employment. ...

Do SMEs Face a Higher Tax Burden? Evidence from Belgian Tax Return Data

“…This raises the question if preferential tax incentives for SMEs, which are widespread in the European Union, are the first-best solution to tackle an SME's competitive disadvantage. In line with the studies of Bergner et al (2017) and Freedman and Crawford (2010), we believe that the removal of tax-related obstacles might be most appropriate to stimulate the growth of SMEs. One of these obstacles relates to the high compliance costs SMEs are facing (Schoonjans et al, 2011).…”

“…Despite the merits of the Devereux-Griffith model, the computations reflect a model investment rather than a model corporation and several assumptions are made with respect to the assets, finance and shareholder structure of the investment company (Devereux and Griffith, 1999). Applying the European Tax Analyzer (ETA), Bergner et al (2017) assess the average tax burden for SMEs and large companies in the EU member states. Generally, they find that the majority of tax incentives in the EU do not have a significant impact on the tax burden of SMEs.…”

“…For Belgium specifically, isolating the impact of SME tax incentives (e.g., reduced tax rates), leads to a reduction in the (absolute) effective tax burden by 2.37% for Belgian SMEs. A disadvantage of the study by Bergner et al (2017), however, is its limitation to domestic markets. Moreover, the ETA simulates the tax burden of a "typical SME or large company" which is defined as an average company on the basis of financial statement data contained in the Amadeus database.…”

“…by far the most popular. Also, special depreciation schemes, tax allowances and tax credits for SMEs can be found in the European Union (European Commission, 2015;Bergner et al, 2017). In Belgium, firms can be subject to a reduced tax system when they have a taxable income lower than EUR 322,500.…”

Public policy reforms to further improve Portuguese export performance

“…The statutory tax rate was reduced to 25% in 2015, but there are various differential rates that result in lower effective statutory rates for smaller firms but higher effective statutory rates for more profitable firms. Rate reductions for smaller firms are poorly targeted, given that such enterprises per se do not create more jobs and innovations nor do they face insurmountable financing constraints (Bergner et al, 2017). The rate of the corporate tax surcharge increases as taxable profits rise.…”