Understanding the ZEW-PwC Report, “Digital Tax Index, 2017”

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In April 2017, a PwC member firm, in co-operation with the Center for European Economic Research (ZEW), published a scientific study, "Digital Tax Index 2017: Locational Tax Attractiveness for Digital Business Models." The study provided an analysis of key provisions of the corporate tax rules in 33 countries applicable to investments in intangible assets.  Many countries have enacted preferential tax provisions intended to encourage and reward businesses that carry out research and development activities and invest in intangible assets. The purpose of the ZEW-PwC study was to assess the relative competitiveness of the German corporate tax rules for those investments as compared to the tax rules of other countries.  ZEW conducted the study relying on information on the corporate tax rules provided by PwC. 

The study calculates for 33 countries the effective average tax rates (EATRs) of a standardized investment in a single type of asset (i.e. an intangible asset receiving immediate expensing) earning specific income (e.g. royalties), which are eligible for special tax provisions intended to encourage innovation. The study assumes that the expenses and income of the hypothetical investment qualify for the most favorable possible tax treatment under local law (e.g., R&D credits and patent boxes).  Although the study refers to this hypothetical investment as a “digital business model,” it merely reflects the tax treatment of an investment in a single asset, not the operation of a digital business.

The study does not calculate EATRs using tax information for actual companies or sectors; more importantly, the study cannot be used to compare the tax burdens of “digital” and “traditional” companies.  In interviews with Bloomberg, Law360, and Disco, Prof. Spengel of ZEW made clear that the study does not support conclusions that the digital sector is undertaxed.

In summary, the ZEW-PwC study enables a comparison of the relative attractiveness of certain countries’ tax regimes for intangible assets developed through R&D, but does not analyze the effective tax rates of actual enterprises or allow conclusions to be drawn regarding corporate taxes paid by the “digital sector”.

ZEW is a well-known German think tank for academic research on international tax matters, enjoying the highest scientific and public reputation.  Prof. Christoph Spengel, the study’s lead author, is a highly respected professor of international taxation at the University of Mannheim and a research fellow of ZEW.

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