Determinants of the variability of corporate effective tax rates (ETRs): evidence for the Netherlands

Abstract

A sizeable portion of US research has tried to assess the ‘fairness’ of the corporate income tax system, that is: are companies treated in a non-discriminatory way under the corporate income tax system. Similar research has, however, never taken place in the Netherlands. The goal of this paper is to address this shortcoming. This paper examines whether an association can be found between the variation in average effective tax rates (ETRs) among Dutch companies and company characteristics such as size, asset mix, extent of foreign operations, performance, leverage, being a public company and being a listed company. Controls are used for net operating loss status, negative tax expense status, and interaction between firm size and net operating loss status and negative tax expense status. The results in the paper are based on an analysis of a pooled panel of company-level data from financial statements in the CD-ROM REACH A datafile for five years, 1994 to 1998. In this paper two financial statement based ETR measures are used. One ETR measure is based on income before taxes and another ETR measure is based on cash flow. Results from a fixed effects generalised linear model provide support for the conclusion that, after controlling for indirect effects, the taxation of corporate profits in the Netherlands is fairly neutral. These results are supported by additional sensitivity analysis.

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