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The Effects of EU Formula Apportionment on Corporate Tax Revenues

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  • Michael P. Devereux
  • Simon Loretz

Abstract

The European Commission proposes to replace the current system of taxing corporate income using separate accounting by a two-step 'consolidation and apportionment' procedure. This paper uses a large set of unconsolidated firm-level data to assess the likely impact on corporate tax revenues in each member state. Taking pre-tax profit as given, overall tax revenues would be likely to drop by 2.5 per cent if companies could choose whether to participate. By contrast, if they were forced to participate, total tax revenues would be likely to increase by more than 2 per cent, leaving some European countries - most notably, Spain, Sweden and the UK - better off. We investigate how sensitive these results are to the apportionment factors used. Copyright (c) 2008 The Authors.

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Bibliographic Info

Article provided by Institute for Fiscal Studies in its journal Fiscal Studies.

Volume (Year): 29 (2008)
Issue (Month): 1 (03)
Pages: 1-33

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Handle: RePEc:ifs:fistud:v:29:y:2008:i:1:p:1-33

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  1. Clemens Fuest & Thomas Hemmelgarn & Fred Ramb, 2007. "How would the introduction of an EU-wide formula apportionment affect the distribution and size of the corporate tax base? An analysis based on German multinationals," International Tax and Public Finance, Springer, Springer, vol. 14(5), pages 605-626, October.
  2. Michael Devereux, 2004. "Debating Proposed Reforms of the Taxation of Corporate Income in the European Union," International Tax and Public Finance, Springer, Springer, vol. 11(1), pages 71-89, January.
  3. Gordon, Roger H & Wilson, John Douglas, 1986. "An Examination of Multijurisdictional Corporate Income Taxation under Formula Apportionment," Econometrica, Econometric Society, Econometric Society, vol. 54(6), pages 1357-73, November.
  4. Goolsbee, Austan & Maydew, Edward L., 2000. "Coveting thy neighbor's manufacturing: the dilemma of state income apportionment," Journal of Public Economics, Elsevier, Elsevier, vol. 75(1), pages 125-143, January.
  5. Douglas Shackelford & Joel Slemrod, 1998. "The Revenue Consequences of Using Formula Apportionment to Calculate U.S. and Foreign-Source Income: A Firm-Level Analysis," International Tax and Public Finance, Springer, Springer, vol. 5(1), pages 41-59, February.
  6. Mintz, Jack & Weiner, Joann Martens, 2003. "Exploring Formula Allocation for the European Union," International Tax and Public Finance, Springer, Springer, vol. 10(6), pages 695-711, November.
  7. Nicodeme, Gaetan, 2006. "Corporate Tax Competition and Coordination in the European Union: What do we know? Where do we stand?," MPRA Paper 107, University Library of Munich, Germany.
  8. Albert van der Horst & Leon Bettendorf & Hugo Rojas-Romagosa, 2007. "Will corporate tax consolidation improve efficiency in the EU?," CPB Document, CPB Netherlands Bureau for Economic Policy Analysis 141, CPB Netherlands Bureau for Economic Policy Analysis.
  9. Marcel Gérard & Joann Weiner, 2003. "Cross-Border Loss Offset and Formulary Apportionment: How do they affect multijurisdictional firm investment spending and interjurisdictional tax competition ?," CESifo Working Paper Series 1004, CESifo Group Munich.
  10. Rüdiger Pethig & Andreas Wagener, 2003. "Profit Tax Competition and Formula Apportionment," Volkswirtschaftliche Diskussionsbeiträge, Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht 106-03, Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht.
  11. Joann Weiner, 2002. "Formula Apportionment in the European Union: A Dream Come True or the EU’s Worst Nightmare?," CESifo Working Paper Series 667, CESifo Group Munich.
  12. Anand, Bharat N. & Sansing, Richard, 2000. "The Weighting Game: Formula Apportionment as an Instrument of Public Policy," National Tax Journal, National Tax Association, vol. 53(n. 2), pages 183-200, June.
  13. Musgrave, Peggy B, 1972. "International Tax Base Division and the Multinational Corporation," Public Finance = Finances publiques, , , vol. 27(4), pages 394-413.
  14. Wolfgang Eggert & Guttorm Schjelderup, 2003. "Symmetric Tax Competition under Formula Apportionment," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 5(2), pages 439-446, 04.
  15. Riedel, Nadine & Runkel, Marco, 2007. "Company tax reform with a water's edge," Journal of Public Economics, Elsevier, Elsevier, vol. 91(7-8), pages 1533-1554, August.
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