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Strategic Consolidation Under Formula Apportionment

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  • Buettner, Thiess
  • Riedel, Nadine
  • Runkel, Marco

Abstract

This paper argues that profit-shifting activities exist for multi-jurisdictional enterprises (MJEs) under a tax system of consolidation and formula apportionment (FA). A theoretical model discusses how a MJE can exploit strategically its impact on the definition of the consolidated group. The analysis shows that the MJE will not consolidate if intra-group tax-rate differences — and thereby potential gains from profit shifting — are large. We test this prediction using confidential firm-level tax-return data for the local business tax in Germany. The identification strategy exploits a quasi-experiment derived from a major company tax reform in 2001 that significantly reduced the costs associated with separating out individual affiliates. Our results show that, evaluated at the sample mean, an increase in the tax-rate variance among a MJE’s affiliates by one standard deviation reduces the number of consolidated affiliates by 20 percent.

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Bibliographic Info

Article provided by National Tax Association in its journal National Tax Journal.

Volume (Year): 64 (2011)
Issue (Month): 2 (June)
Pages: 225-54

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Handle: RePEc:ntj:journl:v:64:y:2011:i:2:p:225-54

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References

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Citations

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Cited by:
  1. Kazuki Onji, 2013. "Who participates in corporate income tax consolidation? Evidence from Japan," AJRC Working Papers 1303, Australia-Japan Research Centre, Crawford School of Public Policy, The Australian National University.
  2. Keser, Claudia & Kimpel, Gerrit & Oestreicher, Andreas, 2014. "The CCCTB option: An experimental study," Center for European, Governance and Economic Development Research Discussion Papers 199, University of Goettingen, Department of Economics.
  3. Johannes Becker & Marco Runkel, 2010. "Corporate tax regime and international allocation of ownership," Working Papers 1010, Oxford University Centre for Business Taxation.
  4. Nadine Riedel, 2011. "Taxing multi-nationals under union wage bargaining," International Tax and Public Finance, Springer, vol. 18(4), pages 399-421, August.

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