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Corporate tax regime and international allocation of ownership

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  • Johannes Becker

    ()
    (Max Planck Institute for Intellectual Property, Competition and Tax Law)

  • Marco Runkel

    ()
    (University of Magdeburg)

Abstract

Would the introduction of a corporate tax system with consolidated tax base and formula apportionment lead to socially wasteful mergers and acquisitions across borders? This paper analyzes a two-country model with an international investor considering acquisitions of already existing target firms in a high-tax country and a low-tax country. The investor is able to shift profits from one location to another for tax saving purposes. Two systems of corporate taxation are compared, a system with separate accounting and a system with tax base consolidation and formula apportionment. It is shown that, under separate accounting, the number of acquisitions is inefficiently high in both the high tax and the low tax country. Under formula apportionment, the number of acquisitions is inefficiently high in the low tax country and inefficiently low in the high tax country. Under tax competition, a novel externality arises that worsens the efficiency properties of equilibrium tax rates under separate accounting, but may play an efficiency enhancing role under formula apportionment.

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Bibliographic Info

Paper provided by Oxford University Centre for Business Taxation in its series Working Papers with number 1010.

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Date of creation: 2010
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Handle: RePEc:btx:wpaper:1010

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Keywords: Corporate Taxation; Separate Accounting; Formula Apportionment;

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  1. Becker, Johannes & Fuest, Clemens, 2011. "Source versus residence based taxation with international mergers and acquisitions," Journal of Public Economics, Elsevier, vol. 95(1-2), pages 28-40, February.
  2. Johannes Becker & Clemens Fuest, 2007. "Taxing Foreign Profits with International Mergers and Acquisitions," Working Papers 0719, Oxford University Centre for Business Taxation.
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  27. Thomas Eichner & Marco Runkel, 2008. "Why the European Union Should Adopt Formula Apportionment with a Sales Factor," Scandinavian Journal of Economics, Wiley Blackwell, vol. 110(3), pages 567-589, 09.
  28. Nielsen, Søren Bo & Raimondos-Møller, Pascalis & Schjelderup, Guttorm, 2010. "Company taxation and tax spillovers: Separate accounting versus formula apportionment," European Economic Review, Elsevier, vol. 54(1), pages 121-132, January.
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