INTERNATIONAL FINANCE SYMPOSIUM 2006

 

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INTERNATIONAL FINANCE SYMPOSIUM 2006

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i INTERNATIONAL FINANCE SYMPOSIUM 2006 “Financial Sector Integration Review and Steps Ahead” MAY 25-26 2006 İSTANBUL

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ii All rights of papers belong to their author in this symposium material. May 2006 İstanbul Marmara University Instute of Banking and Insurance Marmara University School of Banking and Insurance Vienna University of Economics and Business Administration Cover Design: Beta Basım Yayım Dağıtım A.Ş. Printed by Beta Basım Yayım Dağıtım A.Ş. Himaye-i Etfal Sokak Talas Han No. 13-15 Cağaloğlu - İstanbul - TURKEY Phone: (0-212) 511 54 32 - 519 01 77 Fax: (0-212) 511 36 50 e-mail: betakitap@betakitap.com www.betakitap.com ISBN 975 - 400 - 291 - 6

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iii Programme Committee Hanns ABELE, Vienna University of Economics and Business Administration, Vienna Sumru ALTUĞ, Koç University, Istanbul Erişah ARICAN, Marmara University, Istanbul Noyan ARSAN, Koç University, Istanbul Niyazi BERK, Marmara University, Istanbul Adem ÇABUK, Balıkesir University, Balıkesir Münevver ÇETİN, Marmara University, Istanbul Neil A. DOHERTY,Wharton University of Pennsylvania Wolfgang EICHHORN, University of Karlsruhe (TH) Oral ERDOĞAN, Istanbul Bilgi University, Istanbul Cengiz EROL, Middle East Technical University, Ankara Umit EROL, Bahçeşehir University, Istanbul İhsan ERSAN, Istanbul University, Istanbul Abdurrahman FETTAHOĞLU, Kocaeli University, Izmit Gerhard FINK, Vienna University of Economics and Business Administration, Vienna Osman GÜRBÜZ, Marmara University, Istanbul Hermann GÖPPL, University of Karlsruhe (TH) Peter HAISS, Vienna University of Economics and Business Administration, Vienna Wolfgang JANKO, Vienna University of Economics and Business Administration, Vienna Mehmet Baha KARAN, Hacettepe University, Ankara Alan KRAUTSTENGL, The New Anglo-American College, Prague Paul MICHELL, Leeds University Business School Mojmir MRAK, University of Ljubljana, Ljubljana Osman OKKA, Selçuk University, Konya İlker PARASIZ, Member of the Board, Central Bank of The Republic of Turkey Stefan PICHLER, Vienna University of Economics and Business Administration, Vienna Klaus SERFLİNG, Brandenburgische Technical University, Cottbus Güven SEVİL, Anadolu University, Eskişehir Mehmet SÜMER, Yıldız Technical University, Istanbul Maria SZCZUR, The University of Banking and Insurance, Warsaw Suat TEKER, Okan University, Istanbul Isabel UITDEBROECK, Hogeschool West-Vlaanderen, Brugge İlhan ULUDAĞ, Kadir Has University, Istanbul Targan ÜNAL, Istanbul University, Istanbul

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iv Organizing Committee Niyazi BERK, Marmara University, Istanbul Erişah ARICAN, Marmara University, Istanbul Tevfik ALTINOK, Marmara University, Istanbul Wolfgang JANKO, Vienna University of Economics and Business Administration Stefan KOCH, Vienna University of Economics and Business Administration Stefan PICHLER, Vienna University of Economics and Business Administration Erol ULUSOY, Marmara University, Istanbul Hayati ERİŞ, Marmara University, Istanbul Murat AKBALIK, Marmara University, Istanbul Ufuk BAŞOĞLU, Marmara University, Istanbul Ayşe Gül BÖLÜKBAŞI, Marmara University, Istanbul

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v CONTENTS 25.05.2006 Thursday 09:00 Opening Ceremony Prof. Dr. Niyazi BERK, Marmara University, Institute of Banking and Insurance Prof. Dr. Tunç EREM, Rector, Marmara University Osman BİRSEN, Chairman, Istanbul Stock Exchange Ersin ÖZİNCE, Chairman, The Banks Association of Turkey 10:30 Coffee Break 10:45 PANEL I “The Perspective of European Financial Market Integration” Chairman : Dr. Tevfik ALTINOK Marmara University - Ramazan BAŞAK, Director, Şeker Factoring - Murat ÖGEL, Director, Koç Portfolio - Dr. Saruhan ÖZEL, Chief Economist, Denizbank - Güray VURAL, Project Manager, Delegation of the European Commission to Turkey - Assoc.Prof.Dr. Reha YOLALAN, Member of the Board, Tekfenbank 12:45 Lunch 14:00 “The Taxation Policies in the Integration Process of European Union” Chairman : Prof.Dr.Ömer Faruk BATIREL Member of Council of Higher Education of The Republic of Turkey National Tax Policy and the Directives Eva EBERHARTINGER, Martin SIX Structures and Integration of the Taxation Systems and Taxation of Financial Instruments (Marketable Securities) in the European Union and Turkey ............................. 1 Dr.Atilla UYANIK Secondary Offerings of State Owned Incorporations ......................................................... 23 Prof.Dr.Oral ERDOĞAN, Serkan ALBAYRAK, Kenan TATA An Overview of Corporate Governance Theory and Turkish System within European Perspective ........................................................................................................................... 35 Dr. Şahin ASLANTAŞ, Rüya ESER -

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vi 14:00 “Alternative Financial Products: Real Estate Market and Mortgage System” Chairman: Prof.Dr.Eser KARAKAŞ Vice Rector, Bahçeşehir University Valuing Mortgage Insurance Using Bivariate Binominal Option Pricing Technique........... 59 Orhan ERDEM Legal Requirement for Housing Finance in Turkey............................................................... 75 Asst.Prof. Dr. Birgül ŞAKAR The Housing Finance Markets from the Stand Point of Turkey ............................................ 85 Asst.Prof. Dr. Hayati ERİŞ Public Projects Financing: A model for Turkish Case .......................................................... 99 Asst.Prof. Dr. Dilek Leblebici TEKER 15:00 “Risk and Fund Management of Insurance Companies” Chairman : Mustafa SU Chief Executive, Anadolu Sigorta Underlying Principles for Establishing Crop Insurances Services..................................... 117 Aija GRAUDINA, Vladimirs JANSONS Integrated Risk Management in Construction Companies ................................................ 129 Asst.Prof. Dr. Ayşe Gül BÖLÜKBAŞI – Cem BERK Belgian Tax Incentives for Pension Funds and Individual Life .......................................... 149 Dr.Isabel UITDEBROECK Asset Allocation in Defined-Contribution Pension Systems: A Comparison of Global Application and Turkey........................................................................................................ 159 Kıvanç ERMAN Valuing Options Numerically Using Finite Differences with Focus on Trinomial Mattices .............................................................................................................................. 181 Dr. Mehmet HORASANLI 26.05.2006 Friday 09:00 Keynote Speaker: Dr. Alaattin BÜYÜKKAYA, Member of Parliament 09:30 “The Competing Power and Harmonization of Turkish Banking Sector in the EU Integration Process” Chairman : Prof. Dr. Osman GÜRBÜZ Marmara University Bank Efficiency in the Enlarged European Union ............................................................. 193 Daniel HOLLO, Marton NAGY The Effects of Basel II on Banks Credit Pricing Activities and Implications for Turkish Banks. ..................................................................................................................... 235 Asst.Prof. Dr. Hasan EKEN -

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vii Determination of the Relative Position of Turkey in EU with Regard to Banking Performance......................................................................................................................... 245 Rsc. Asst. Gülhayat G. ŞİMŞEK, Dr. Ali KÖSE, Rsc. Asst. Seher TEZERGİL The Potential Impact and Improvements of Basel II on the Financial Market in Turkey .................................................................................................................................. 261 Asst. Prof. Dr. Tülin ATAKAN, Rsc. Asst. Bengü VURAN, Rsc. Asst. İlker GÖKBULUT A Multivariate Analysis of the Financial Aspects of Foreign and Domestic Banks in Turkey .............................................................................................................................. 277 Asst.Prof.Dr. Murat AKBALIK Effects of Basel-II Standards on Small-Medium Size Enterprises: Evidence from the Istanbul Stock Exchange .................................................................................................... 289 Assoc.Prof. Dr. Mustafa Kemal YILMAZ, Ali KÜÇÜKÇOLAK 11:00 Coffee-Break 11:30 “The Capital Market Performance of EU in the Integration Process” Chairman : Assoc. Prof. Dr. Ekrem KESKİN Secretary General, The Banks Association of Turkey The Market Performance of Initial Public Offerings in Istanbul Stock Exchange ............ 313 Assoc.Prof. Dr. Mustafa Kemal YILMAZ, Recep BİLDİK Validation of Credit Rating System Using Multi Rather Information................................. 345 Kurt HORNIK, Rainer JANKOWITSCH, Manuel LINGO, Stefan PICHLER, Gerhard WINKLER The Measurement of Intellectual Capital and Intellectual Capital Performances of Turkish Textile Firms in Istanbul Stock Exchange Market .................................................. 365 İbrahim ÖZSOY, Oktay TAŞ Do Dragons Confuse the Days of the Week and Months of the Year? Evidence from the Chinese Stock Market .......................................................................................................... 387 Güzhan GÜLAY, Ömer BİLEN 13:00 Lunch 14:00 “Financial Reforms, Economic Development and the Effects of Direct Investments in Central and Eastern Europe Chairman : Prof.Dr.Hermann GÖPPL Karlsruhe University Foreign Direct Investment in the Financial Sector: The Engine of Growth for Central and Eastern Europe................................................................................................ 407 Markus ELLER, Peter HAISS, Katharina STEINER Changing Importance of Financial Sectors for Growth from Transition to Cohesion and European Integration ................................................................................... 429 Gerhard FINK, Peter HAISS, Goran VUKSIC, Bettina HAGMAYR - - - - - - -

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viii Transparentness of Economic Environment of European Unions New Member Countries and Allocation of FDI......................................................................................... 443 Jolana VOLEJNIKOVA, Marcela KOZENA Foreign Direct Investments in the Financial Sector: Turkey .............................................. 453 Murat ÖGEL, Nur YAVUZ, Lale BOĞDAY 14:00 “ The Effects of Derivative Products on the Stability of European Markets” Chairman : Prof.Dr.Noyan ARSAN Koç University Do the Derivatives Help the Companies to Manage Their Risks ? Evidence from The Istanbul Stock Exchange...................................................................................................... 465 Ali İhsan GÜNGÖR, Celali YILMAZ, Assoc.Prof.Dr. Mustafa Kemal YILMAZ Extracting the Risk-neutral Distribution of the Federal Funds Rate from Option Prices .. 475 Krassimir NIKOLOV, Boris PETROV Applications of Structural Derivate Instruments and Hedging Techniques for Corporate Institutions on Turkish Financial Markets ......................................................... 489 Dr. K. Evren BOLGÜN 15:30 “Bond Markets, Risk Management and Economic Integration” Chairman : Prof. Dr. Wolfgang JANKO Vienna University of Economics and Business Administration Bonds Market and Economic Integration: Asia and Europe Compared............................. 513 Peter R. HAISS, Stefan MARIN Bestfit Model Selection of Term Structure of Interest Rates: An Application on Turkish Market Case .......................................................................................................... 535 Prof.Dr. Suat TEKER, Barış AKÇAY Testing Fractional Integration of Forward Rat Unbiasedness Hypothesis: Evidence from Turk DEX ..................................................................................................... 545 Assoc.Prof.Dr. Nurgül CHAMBERS, Atilla ÇİFTER Derivatives in Financial Risk Management: An Empirical Investigation........................... 569 H. Ali ATA, Mustafa UĞURLU 15:30 “Information Systems and Estimation Techniques in Financial Markets” Chairman : Prof.Dr.İlker PARASIZ Member of the Board, Central Bank of The Republic of Turkey Forecasting Market Crashes: Further International Evidence ........................................... 585 Terhi JOKIPII Theoretical Importance of Artificial Neural Networks for Efficiency of Financial Markets................................................................................................................ 613 Dr. Alper ÖZÜN - - - - - -

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ix Determining Leading Indicators for Banking Crises via Signal Approach ........................ 623 Dr.Dina ÇAKMUR YILDIRTAN, Asst. Prof. Dr. İlyas AKHİSAR The Option of the Classification of the Banking Stability .................................................. 639 Libena CERNOHORSKA, Jan CERNOHORSKY Foreign Banks in Turkey and other EU Accession Countries – does Minority and Majority Ownership Make the Difference?......................................................................... 649 Bettina HAGMAYR, Peter HAISS 16:30 PANEL II Chairman : M.Atilla KURAMA Board Member, Türkiye Finans ve Katılım Bankası Ateşhan AYBARS, Economist Hamdi BAĞCI, Chairman, Turkish Derivatives Exchange Ayşe Botan BERKER, Director, Fitch Ratings Istanbul Asst. Prof. Dr. Yaşar ERDİNÇ, Beykent University Dr. Gürman TEVFİK, Chairman, Turkish Institutional Investment Managers’ Association - -

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1 STRUCTURES AND INTEGRATION OF THE TAXATION SYSTEMS AND TAXATION OF FINANCIAL INSTRUMENTS (MARKETABLE SECURITIES) IN THE EUROPEAN UNION AND IN TURKEY Dr. Atilla UYANIK* ABSTRACT The specialization and globalization of financial markets brought with it the development of financial means and techniques, first in developed countries and then in developing ones. The European Union's financial services industry is being transformed by the interaction of several phenomena, including the wider process of globalization, the harmonization of the regulatory framework across the Union and the implementation of financial reforms in the Member States. From this point of view, the tax system and policy has been an important instrument. In recent years, important changes have occurred in tax laws especially in income tax code. Tax harmonization, tax co-ordination, tax competition are expressions, which are used to describe the processes of approachments of the taxation systems in different countries, or which lead to such outcomes. In Turkey, especially after the Temporary Article 67 of the PIT Law regulates the taxation of the capital income taxed at flat rate of 15 percent. The capital income regulated under this article are the gains derived from the alienation and t he retention of the marketable securities and other capital market instruments, and the taxation of the deposit interests, repo gains and the income that is derived from the private finance institutions. Income from all sources is aggregated and total income is subjected to the respective tax rate defined by the progressive rate schedule. (Comprehensive Income Taxation) EU has successfully gone through a few stages of tax harmonization, but the problem of tax distortions and of harmful versus fair competition in taxation systems is coming back. Key Word: Taxation, Financial Instruments, Integration, Tax system, EU, Turkey I. INTRODUCTION How much have the European Union (EU) countries achieved in tax harmonization from an economic point of view and what are the future prospects in this field? Tax competition and tax harmonization have become a hot issue after the latest accession of ten countries to the European Union as on 1-st of May, 2004. However it has been debated vigorously at the various international and national forums at least since the OECD report“ Harmful Tax Competition: An Emerging Global Issue” published in 1998. The European Union went through a few stages of tax harmonization and the major achievements were accomplished. * Marmara University & CPA, atila.uyanik@isbank.net.tr

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2 But the problem of tax distortions and of harmful versus fair competition in taxation systems is coming back. There are many dimensions of this debate: economic, legal, constitutional, administrative, and political. One may say that only comprehensive approach to this debate is appropriate. My objective is much more modest. The main objective is to provide analysis of the current progress on tax harmonization in the EU from the economic point of view, and to discuss the future prospects in this field. The European Union's financial services industry is being transformed by the interaction of several phenomena, including the wider process of globalisation, the harmonisation of the regulatory framework across the Union and the implementation of financial reforms in the Member States. The combined effect of these developments is to integrate progressively the EU financial services industry, a process that is reflected in more homogeneous markets, a wave of consolidation among intermediaries and the emergence of new and innovative products and techniques. Since 1999, the successful introduction of the Euro has also helped in this transformation by eliminating exchange risk for financial flows across most of the Union. The specialization and globalization of financial markets brought with it the development of financial means and techniques, first in developed countries and then in developing ones. In order to increase the workability of the capital and money markets, the regulations founding the basis of rapidly increasing financial products, have gained more importance. For example, Temporary Article 67, which was added to the Incomer Tax Law through Article 30 of the law numbered 5281, contains provisions relating to the taxation of the gains derived from the alienation and the retention of the marketable securities and other capital market instruments, and the taxation of the deposit interests, repo gains and the income that is derived from the private finance institutions1. This paper aims to focus on the effects of relevant regulations as well as the taxation of financial products over financial markets starting first with theoretical approaches in a systematical way between TR and EU. The subject is treated widely in consideration to theory and application with a special emphasis to the practices both in the EU and Turkey. II- TAX THEORY AND THE EFFECTS OF TAXATION IN FINANCIAL PRODUCTS ON THE FINANCIAL SYSTEM: Tax theory defines the burden of tax and who actually makes the tax payment to the government. The incidence of taxation is seen to fall on the person legally responsible for meeting the tax bill2. The welfare costs or excess burden of taxation can be identified by reference to indifference curve analysis. The individual is assumed to be faced with a fixed budget which permits the choice of any combination of two goods. The slope of the budget, will reflect the relative prices of two goods that depends on taxation or not. Before taxation the individual will chose that combination of the two goods and thereby attain the highest level of welfare possible. 1 2 THE INCOME TAX GENERAL COMMUNIQUÉ SERIES NO. 257; Official Gazette No: 26039; Official Gazette Date 30.12.2005. Cullis, John - Jones, Philip, Public Finance and Public Choice, Analytical Perspectives, London 1992, s. 181-182

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3 Tax capitalization is a topic that is not only of importance in itself, but also provides a convenient link between concept of incidence and concept of allocation. In addition the concept once more warns against simply the face value analysis of taxation3. Direct taxes In contrast to indirect taxes, the harmonization of direct taxes has seen little progress, at least not via the relevant articles of the EC Treaty. Art. 94 of the EC Treaty provides for the approximation of provisions in the legislation of Member States which directly affect the common market. When the EEC was founded in 1957, the main goal was to realize a common market within 12 years (old Art. 8 EC Treaty). In 1987, the term “internal market” was introduced in Art. 8a of the EC Treaty, which meant the same as “common market” but conceals the fact that such a common market had still not been realized. An internal market, according to the ECJ, is a market without obstacles to intra-community trade in order to merge the national markets into a single market bringing about conditions as close as possible to those for a genuine internal market. Many measures that are necessary for a functioning internal market have been adopted since 1984, when the then EC Commissioner Lord Cockfield produced his White Paper. Direct taxes turned out to be a stumbling block, mainly because Member States were reluctant to surrender sovereignty in this area. III. GENERAL CONSIDERATIONS OF TAX INTEGRATION IN THE EU The analysis is based on the comprehensive and harmonized framework of the European system of national and regional accounts (ESA95), which has been adopted and implemented throughout Europe. The ESA95 methodology has contributed to major improvements and progress in national accounts data. In recent years Eurostat has provided considerable assistance with application of this methodology in the new Member States. The fruitful collaboration between Eurostat and the national accounts departments in Member States together with the transmission of detailed tax receipts and social contributions data by institutional sector has created one of the most structured, harmonised and complete databases on taxes and social contributions in Europe. Tax harmonization, tax co-ordination, tax competition are expressions, which are used to describe the processes of approachments of the taxation systems in different countries, or which lead to such outcomes. The European Union is a consequence of the integration efforts of its members. As John Kay4 stated that the integration may be done through harmonization (Bismarckian approach) or through competition (Jeffersonian approach). The first approach is based on assumption that integration requires setting rules of tax system and policies, for instance in form of legally binding regulations by the member states. The Jeffersonian approach presumes that there is space for member states to promote integration through their own institutions settings, and then the consequences of these rules will follow. Sijbren Cnossen puts it simply as “choice between prescription and adaptation”5. 3 4 5 Musgrave, R. A. ve Musgrave, P.B., Public Finance In Theory and Practice, 5th ed., McGraw-Hill, New York 1989, s. 381-382. Kay, John (1993): Taxation Policy and Economic integration, in A.Knoester (ed.): Taxation in the United States and Europe: Theory and Practice, New York, St. Martin Press. One has to observe that this definition of the tax competition differs to the concept that tax competition is only a process of reducing the corporate income tax in order to attract the foreign direct investors. Cnossen, S. (2001): Tax Policy in the European Union: A Review of Issues and Options, www.ocfeb.nl

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4 IV. TAX BARRIERS TO A SINGLE MARKET FOR FINANCIAL SERVICES Variations in the tax treatment of savings products between Member States continues to act as a barrier to creating of a genuine Single Market for financial services across the EU. These varying national tax rules can act as barriers to cross-border provision of financial services. In order to advance national public policy objectives, Member States frequently provide various forms of tax incentives for some long-term savings products, such as pensions, life insurance savings products, or special savings schemes. Such tax privileges can also act as a form of protectionist barrier to an EU single market for financial services. This is particularly the case if these tax incentives are restricted to financial services providers resident in a member country. Two areas where tax obstacles are particularly prevalent are in the provision of pensions, and that of collective investment schemes (UCITS). The following section examines these in more detail. The problems identified can arise, mutatis mutandis, in other financial services fields. V. TAX BARRIERS TO COLLECTIVE INVESTMENTS (UCITS) The 1985 UCITS directive opened the way for cross-border marketing of investment funds in the EU. However, tax rules do not fall within the scope of this directive, which means that this remains a host country issue. The UCITS directive has in many respects been very successful in promoting the growth of investment funds in the EU. UCITS are established in all Member States, with total assets of nearly 41% of EU GDP at the end of 2000. Between 1995 and 2000, the sector recorded an asset annual growth rate of more than 20%. There is an emerging single market in UCITS, with more than 20,000 foreign registrations of UCITS in the EU. However, tax barriers are one of the major reasons why the EU single market in UCITS has not developed even more rapidly. Promoters of these funds are discouraged by national tax rules from selling UCITS in particular countries. One of the consequences is that average fund sizes are smaller than might otherwise be the case, which in turn could be contributing to higher costs for fund sponsors, managers and consumers. There are significant tax barriers in some EU countries, which hinder the sale of UCITS into these markets. To the extent that national tax rules frustrate the sale of UCITS into a particular Member State, these tax rules may be challenged under the Treaty through the European Court of Justice. Similarly, tax relief given to investors in a domestic UCITS but not to the same investors investing in a foreign UCITS may also be challenged in the European Court of Justice.

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5 Significant discriminatory tax barriers to the sale of foreign UCITS in EU countries Country Austria Belgium Description of discriminatory tax measure Existing income tax regime i. Tax on distributions to individual investors ii. Participation exemption iii. Benefit from foreign tax credits Foreign Fund legislation None noted i. Plan d'Epargne en Actions ('PEA') ii. Franchise relief iii. French imputation tax system i. Existing foreign investment fund law ii. New tax reform measures Investment funds legislation which penalises foreign UCITS Taxation of Irish investors in offshore UCITS Capital gains tax None noted Reclaim of foreign withholding taxes Different income tax regimes for individual investors None noted None noted i. Offshore fund legislation ii. UK Imputation tax system Denmark Finland France Germany Greece Ireland Italy Luxembourg Netherlands Portugal Spain Sweeden UK VI - TAX BURDEN ON CAPITAL The implicit tax rate (ITR) on capital rose sharply between 1995 and 1999. This is also true for the subindicator ITRs on corporate income and, to a lesser extent, the ITR on the capital and business income of households and the self-employed. Since 1999 a general reduction in the ITRs on capital is discernible, partly offsetting the increase in prior years. In 2003 this trend continued in the EU15, but not in the NMS-10 where a significant increase in the rate was noted. In addition, structural changes in the financing of companies have led to an increase in the ITR on capital and business income. Empirical evidence exists to suggest that corporations altered their capital structures in favour of equity during the period, consequently paying less interest and making more dividend payments. This also happened against the background of falling interest rates. Most tax systems in the EU are not neutral towards different forms of investment financing and allow deductions for interest payments when calculating the taxable profits. The shift towards more dividend distributions results on average in a higher tax burden on companies' profits as a consequence of the nature of tax legislation. These factors have disguised the influence of recent tax policy measures aimed at reducing the tax burden for corporations and at improving the functioning of capital markets. Between 1995 and

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6 2004 the average top statutory corporate tax rate (including local taxes and surcharges) in the EU15 countries decreased by 6.6 percentage points. The new Member States first reduced their rates at a similar pace but have accelerated the reduction in recent years. In fact, the process of tax competition and the reduction in corporate tax rates is a longer lasting trend and was not initiated by the enlargement of the Union. At the same time, cuts in the nominal statutory tax rates on corporations were often accompanied by measures that broadened the taxable base (e.g. by reducing the rates of capital depreciation allowances), offsetting at least to some extent the effects of the reductions in the statutory rates in the period 1995 to 2003. The average implicit tax rate on capital in the EU25 increased steadily from 23.2% in 1995 to 27.8% in 1999, then fell to reach 25.4% in 2003. The increase occurred against a background of falling statutory corporate tax rates and simultaneous base broadening measures. However, an important part of the increase in the implicit tax rate on capital can be attributed to cyclical factors, i.e. the economic expansion up to 2000. The decline in the implicit tax rate observed in 2001, 2002 and 2003 was linked to the slowdown of economic growth and the impact of measures taken to reduce tax rates. The lowest implicit tax rates on capital in 2003 were recorded in Lithuania (6.5%), Estonia (10.9%) and Greece (17.0%), and the highest in France (35.9%), Ireland (33.3%) and Portugal (32.6%). The average implicit tax rate on consumption in the EU25 was 22.0% in 2003, and has remained relatively stable since 1995. Consumption was most taxed in Denmark (33.9%), Sweden (30.5%) and Hungary (28.5%). Malta (16.1%), Spain (16.5%) and Italy (17.0%), on the other hand, registered the lowest implicit tax rates.

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