729 Prague Economic Papers, 2019, 28(6), 729– 747, https://doi.org/10.18267/j.pep.719 DO SMES FACE A HIGHER TAX BURDEN? EVIDENCE FROM BELGIAN TAX RETURN DATA Pieter Buyl, Annelies Roggeman * Abstract The public debate on taxation of domestic small and medium enterprises (SMEs) versus large and multinational enterprises (MNEs) is highly relevant nowadays. Using confidential tax return data instead of financial statement data, the results indicate that domestic SMEs face on average a 1.6 and 4.8 percentage-point higher effective tax burden compared to large domestic and large MNEs respectively. This suggests that tax incentives for SMEs are inadequate to compensate for the tax advantages of large and internationally operating companies. Furthermore, we show that the use of information built exclusively upon accounting data could bias the results. Keywords: corporate tax return data, SMEs, effective tax burden, reduced tax rates JEL Classification: F23, H25, H26 1. Introduction In the aftermath of the financial crisis and the subsequent economic downturn, tax avoidance techniques (e.g., transfer pricing) by multinational enterprises (MNEs) have come under scrutiny by tax administrations, tax experts and the general public (European Commission, 2015). It is argued that MNEs’ aggressive tax avoidance techniques lead to internal market distortions and higher effective tax burdens for smaller firms, which primarily operate domestically (European Commission, 2016a). 1 Current literature especially focuses on tax burden differences between large MNEs and large domestic firms (e.g., Dyreng et al., 2017), or often limits itself to measuring the impact of size in general, without a more accurate classification for SMEs (e.g., Gupta and Newberry, 1997; Richardson and Lanis, 2007; Onofrei et al., 2018). Moreover, smaller firms are often left out because a certain threshold is applied due to data constraints (e.g., Janssen, 2005; Vandenbussche et al., 2006). This is unfortunate, as SMEs make an important contribution to employment, job creation and innovation (OECD, 2015). One of the exceptions is the study by the European Commission (2015), in which the effective average tax rate for cross-border investments of large multinationals is compared to the effective tax rates of SMEs operating on domestic markets. Applying the Devereux- Griffith methodology (1999), the results for Belgium show that, when taking into account 1 In line with the European Commission, we define aggressive tax avoidance strategies as strategies that fall within the limits of the law, but go against the spirit of the law. * Pieter Buyl, Ghent University, Corporate Finance and Taxation, Ghent, Belgium (pieter.buyl@ugent.be); Annelies Roggeman, Ghent University, Corporate Finance and Taxation, Ghent, Belgium (annelies. roggeman@ugent.be).