This paper analyzes the evolution of Book-Tax Conformity in Germany and its variation by industry, legal form, and firm size. Prior research examines the consequences of Book-Tax Conformity for earnings quality, tax avoidance, and auditing, while legal scholarship traces its historical development, yet no study systematically quantifies Book-Tax Conformity in the German context or separates legislative effects from firm-level economic developments. We address this gap using the European Tax Analyzer, a simulation model, to derive annual measures of Book-Tax Conformity for 2007-2024. By applying each year’s legal framework to an identical set of financial statements, we hold economic transactions constant and isolate the impact of changes in national tax law. We model three firm sizes (small, medium, large), two industries (manufacturing, digital), and two legal forms (corporations, partnerships), producing twelve time series. The study offers the first law-driven, quantitative assessment of Book-Tax Conformity in Germany, combining income- and balance-sheet-based measures.

We introduce DiRECT, a corporate tax microsimulation model for policy analysis that estimates tax bases and corporate tax liabilities for over 4.3 million firms in nine EU countries (2016–2019), helping overcome the limited availability of administrative firm-level tax data. Using financial accounting data, DiRECT implements methodological advances in sample construction and simulates key national tax provisions, including depreciation, interest limitation rules, tax-exempt dividend income, allowances for corporate equity, and intra-group/inter-period loss offsetting. Based on observed and simulated deductions, we derive firm-level effective tax rates (DiRECT ETRs) and book–tax difference (BTD) measures, and document their distributions across countries and firm size classes. This reveals systematic cross-sectional patterns in tax burdens and the use and intensity of tax deductions. We validate the model through detailed benchmarking against firm-level administrative tax data from Poland. DiRECT enables distributional and revenue analysis of corporate tax reforms.

Corporate tax cuts are often defended as pro-competitive, yet they may also encourage profit shifting. This paper quantifies the relative importance of these two forces in international services trade. Using comprehensive German firm-level data that link services imports to multinationals’ foreign affiliates and to detailed service categories, we exploit plausibly exogenous changes in partner-country corporate tax rates between 2009 and 2019. Lower partner country tax rates increase German firms’ services imports, consistent with real economic responses. However, the effect is much stronger for multinationals trading with countries where they hold affiliates and is accompanied by changes in the composition and average value of traded services, consistent with tax-motivated pricing and invoicing. A staggered difference-in-differences design implies that roughly 60% of multinationals’ response reflects tax optimisation.

In recent years, several policies – in particular those introduced in the wake of the OECD’s BEPS project – have made it much more difficult for MNEs to shift profits to low-tax countries. We show that in response, MNEs have restructured their tax strategies and now exploit within-country tax avoidance possibilities more strongly. To do so, we exploit the specific corporate tax structure in Germany, where municipal profit taxes vary between 7 and 20.3 percent. We show that profits become more sensitive to within-country tax differentials over time, consistent with firms shifting more profits within Germany after the BEPS reforms than they did before. By contrast, responsiveness to international tax rate differentials does not increase during the same period. Effects are driven by firms that are part of a multinational entity, but not part of a tax-consolidated group. The increase in local profit shifting is based on non-debt shifting channels.