Evidence Against the Undertaxation of Digital Companies from the Weighted Effective Tax Rate Method Analysis

Abstract

This study scrutinizes the prevalent belief that traditional companies face a more substantial taxation burden compared to digital firms. Our research delves into the effective corporate tax rate (ECTR) for an extensive sample of 463 global companies, encompassing 217 digital and 246 traditional entities, over the period from 2010 to 2020. Utilizing a unique dataset, our analysis reveals that the effective tax rates for digital and traditional companies do not significantly diverge. Contrary to common perceptions, in certain years, digital companies shouldered a heavier tax burden. This finding suggests that to achieve parity in taxation between digital and traditional firms, digital entities would have warranted tax relief, particularly between 2012 and 2015 when their tax rates were demonstrably higher. Furthermore, our models highlight a gradual increase in the effective corporate tax rate for digital companies over time, reflecting their growth and stabilization in the market. Throughout the entire period under study, including each individual year from 2010 to 2020, the difference in the effective tax rate between digital and traditional companies did not exceed an average of three percentage points across the selected countries. This threshold of three percent is notably the same as the digital tax proposed by the European Commission as a provisional measure. Since the observed difference consistently fell below this margin, imposing an additional 3% tax on digital services would, in effect, impose a disproportionately higher tax burden on digital firms than on their traditional counterparts.