What Really Affects German Firms' Effective Tax Rate?

Abstract

This paper investigates the determinants of the effective tax rate (ETR) of German firms spanning the Germany’s Corporate Tax Reform 2008 (GTR08). This paper is the first to analyze the drivers of ETR using German longitudinal data. The results show that larger companies, growth firms, and firms with higher free cash flow (FCF) appear to have higher ETR. Leverage and operating lease expenses tend to be negatively associated with ETR. The findings show that more profitable firms appear to engage more in tax strategies that result in lower ETRs. Moreover, they indicate that multinational firms have more possibilities to reduce the tax burden, resulting in a negative association with ETR. Germany’s tax reform of 2008 has a negative effect on ETR and impacts some firm-specific factors. For more levered firms, the association between leverage and ETR is positive affected by the ETR.