Good for the public purse

Multinational companies have a reputation for deliberately reporting fewer profits in order to minimise their tax burdens. However, a recent study by the Cologne Institute for Economic Research (IW) indicates that these global players in fact contribute more tax to the public purse than companies that exclusively do business in Germany.

Over many years, Luxemburg helped corporations minimise their tax burdens. Ever since the “Luxleaks” revelations brought this matter to the attention of the general public, multinational companies have been subject to increased scrutiny. In its recent study, IW looked into the link between a corporation’s multinational activities and its contribution to the public purse – at present, German companies have about 35,000 subsidiaries abroad, while about 15,000 German companies are being funded by international investors.

The study revealed that both cases are actually beneficial to the public purse. “The more international the outlook of a company, the higher its tax contribution”, said IW finance expert Tobias Hentze. That’s why those German states that are home to many multinational companies receive the highest tax revenues, as these companies are likely to be more successful – as is the case in Hessen, North Rhine-Westphalia, Bavaria, Baden-Württemberg and the city-state of Hamburg. In addition, the study demonstrates that an additional 1 per cent in foreign trade volume corresponds to an additional 0.2 to 0.4 per cent of corporation tax revenues; if international direct investments increase by 1 per cent, corporation tax revenues tend to rise by up to 0.1 per cent.

While the study does not suggest that multinational companies never shift their profits, it does indicate that excessive regulation of global players would not be in Germany’s best interests, as this would lead to competitive disadvantages. Instead, policy-makers should embrace companies which are successful in international markets and their guaranteed contributions to the public purse.