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Will corporate tax consolidation improve efficiency in the EU?

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Author Info
Albert van der Horst ()
Leon Bettendorf ()
Hugo Rojas-Romagosa ()

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Abstract

Consolidation of the tax base in the European Union is expected to curve compliance costs and reduce profit shifting. A number of proposals for consolidation from the European Commission are simulated with the applied general equilibrium model CORTAX. We show that the benefits from consolidation are offset by two weaknesses in the proposals for a common consolidated tax base. Formula apportionment, which is needed to allocate the consolidated taxable profits across jurisdictions, creates new tax planning possibilities for MNEs and allows them to benefit from existing tax rate differentials in the European Union. In addition, it triggers tax competition as member states may attract foreign investment by reducing their tax rates. The second distortion is an unlevel playing field, which is introduced if only part of the firms participate in the consolidation. The gains from consolidation can be fully grasped if it is obliged for all firms and if it is accompanied by a harmonisation of the tax rate.

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Paper provided by CPB Netherlands Bureau for Economic Policy Analysis in its series CPB Documents with number 141.

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Date of creation: Mar 2007
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Handle: RePEc:cpb:docmnt:141

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Related research
Keywords: corporate tax; consolidation; formula apportionment; European Union; general equilibrium model;

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Find related papers by JEL classification:
H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Leon Bettendorf & Joeri Gorter & Albert van der Horst, 2006. "Who benefits from tax competition in the European Union?," CPB Documents 125, CPB Netherlands Bureau for Economic Policy Analysis. [Downloadable!]
  2. Walter Hellerstein & Charles E. McLure, Jr., 2004. "The European Commission's Report on Company Income Taxation: What the EU Can Learn from the Experience of the US States," International Tax and Public Finance, Springer, vol. 11(2), pages 199-220, 03. [Downloadable!]
    Other versions:
  3. Marcel Gérard, 2006. "Reforming the Taxation of Multijurisdictional Enterprises in Europe, a Tentative Appraisal," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  4. Michael P Devereux & Simon Loretz, 2007. "The Effects of EU Formula Apportionment on Corporate Tax Revenues," Working Papers 0706, Oxford University Centre for Business Taxation. [Downloadable!]
    Other versions:
  5. Riedel, Nadine & Runkel, Marco, 2007. "Company tax reform with a water's edge," Journal of Public Economics, Elsevier, vol. 91(7-8), pages 1533-1554, August. [Downloadable!] (restricted)
  6. Martin Finkenzeller & Christoph Spengel, 2004. "Measuring the Effective Levels of Company Taxation in the New Member States: A Quantitative Analysis," Taxation Papers 7, Directorate General Taxation and Customs Union, European Commission, revised Dec 2004. [Downloadable!]
  7. Leon Bettendorf & Albert van der Horst, 2006. "Documentation of CORTAX," CPB Memoranda 161, CPB Netherlands Bureau for Economic Policy Analysis. [Downloadable!]
  8. Goolsbee, Austan & Maydew, Edward L., 2000. "Coveting thy neighbor's manufacturing: the dilemma of state income apportionment," Journal of Public Economics, Elsevier, vol. 75(1), pages 125-143, January. [Downloadable!] (restricted)
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  9. Ruediger Pethig & Andreas Wagener, 2003. "Profit Tax Competition and Formula Apportionment," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  10. Weiner, Joann, 2002. "Formula Apportionment in the European Union: A Dream Come True or the EU's Worst Nightmare?," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  11. Gordon, Roger H & Wilson, John Douglas, 1986. "An Examination of Multijurisdictional Corporate Income Taxation under Formula Apportionment," Econometrica, Econometric Society, vol. 54(6), pages 1357-73, November. [Downloadable!] (restricted)
  12. Michael P. Devereux & Rachel Griffith & Alexander Klemm, 2002. "Corporate income tax reforms and international tax competition," Economic Policy, CEPR, CES, MSH, vol. 17(35), pages 449-495, October. [Downloadable!] (restricted)
  13. Klassen, Kenneth J. & Shackelford, Douglas A., 1998. "State and provincial corporate tax planning: income shifting and sales apportionment factor management," Journal of Accounting and Economics, Elsevier, vol. 25(3), pages 385-406, June. [Downloadable!] (restricted)
  14. Kind, Hans Jarle & Midelfart, Karen Helene & Schjelderup, Guttorm, 2005. "Corporate tax systems, multinational enterprises, and economic integration," Journal of International Economics, Elsevier, vol. 65(2), pages 507-521, March. [Downloadable!] (restricted)
    Other versions:
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Ruud de Mooij & Michael P. Devereux, 2009. "Alternative Systems of Business Tax in Europe: An applied analysis of ACE and CBIT Reforms," Taxation Papers 17, Directorate General Taxation and Customs Union, European Commission. [Downloadable!]
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