An Effective Average Tax Rate as the Deciding Factor in Tax Competitiveness in the Context of Foreign Investment Influx

Abstract

A higher tax burden in individual countries need not always deter investors from investing profitably. Countries use tax burden levels in the form of changes in tax rates to attract foreign investment. The main objective of this study is to examine the tax competitiveness of the Slovak Republic compared to European Union (EU) countries (EU-27) and to evaluate the origin, extent, and form of investments from foreign investors in tangible and intangible assets in the Slovak Republic. To meet this objective, we first calculate the average tax rate for specific crossborder investments coming to Slovakia from all EU countries. To determine tax competitiveness, we compare the calculated effective average tax rate (EATR) with the EATR in individual EU countries. Finally, we perform an analysis of EATR and foreign direct investment (FDI) using cluster analysis, which categorises EU countries and evaluates their tax competitiveness. The analysis and comparison of values are conducted for the year 2019, while the countries are divided into old (EU-15) and new (EU-12) EU member countries. The article concludes that the calculated Slovak EART for cross-border investment is more profitable for old EU member countries and is, thus, more tax-competitive versus investors’ countries of origin. We can further state that the tax burden is among the most important indicators for investors and, thus, a lower EATR value than that in an investor’s country of origin contributes to the inflow of equity participation of FDI in Slovakia.

Keywords

• tax competitiveness
• effective average tax rate
• inflow of foreign direct investment
• cross-border investment
• intangible and tangible assets