Who has the most competitive tax system in Europe?

Estonia has the most competitive tax code in Europe – and the UK and Germany are surging while Italy stays in the doldrums, research by the Tax Foundation has found.  

In a report published on Monday, the US-based think tank cites Tallinn’s 20% rates on corporate and individual income, and a property tax that looks at land value rather than investment, as it awarded the Baltic nation top global position for the eleventh year running.

“Capital is highly mobile. Businesses can choose to invest in any number of countries throughout the world to find the highest rate of return,” the report said, adding that competitive and neutral tax codes can promote sustainable growth.

The report looks at which countries offer the lowest marginal rates – but also examines more detailed structural features, such as how likely tax systems are to distort behaviour. 

It cites research showing that corporate income tax is the most harmful to the economy – though alternative sources of revenue, such as sales or consumption taxes, can fall disproportionately on the poor.

Czechia slipped three places in the annual rankings after raising corporate tax rates from 19% to 21%, but Germany and the UK are praised for offering more generous allowances for corporate investment in equipment. 

Italy is rated the least competitive tax code in Europe, just behind France – and Rome is criticised for its having “multiple distortionary property taxes” and an unusually narrow VAT base.

The news comes as major European countries struggle to boost their economies – but also recover public finances that were battered first by the pandemic, then by the energy crisis.

France’s Prime Minister Michel Barnier recently announced he’ll raise billions by hiking taxes on big businesses and the wealthy, as he seeks to bring down the country’s deficit – among the highest in the bloc – in line with EU rules.

The idea of countries competing to tempt business via the tax code has also led to fears of a race to the bottom – not least in a world where digital businesses can often easily shift operations.

Developed countries meeting in the Organization for Economic Cooperation and Development (OECD) have already agreed that big corporations should face a minimum tax rate of 15% on their profits.

The EU’s top court also recently ruled that a tax concession in Ireland that saw Apple pay rates as low as 0.005% amounted to an unlawful subsidy.

Despite its low corporate tax rate and reputation for business-friendly deals, high taxes on income and dividends put Ireland towards the bottom of the Tax Foundation’s table, which examines the OECD’s 38 members.