Formula apportionment vs. separate accounting: A private information perspective
In 2002, the European Commission recommended that member countries use formula apportionment procedures to tax multinational companies. This departure from the standard separate accounting (transfer pricing) approach is an attempt to reduce the costs and distortions associated with auditing transfer prices. Unfortunately, apportionment formulas create their own economic distortions and, contrary to popular belief, they do not eliminate distortions due to asymmetric information between the multinational and the national tax authorities. In this paper, I explicitly model the role of private information in two tax competition games: one in which tax liabilities are calculated under formula apportionment and one in which tax liabilities are calculated under separate accounting and transfer prices are audited. Switching to a formula apportionment system affects the after-tax profit of multinationals and the tax revenues paid by both domestic and foreign firms. The direction and magnitude of the changes depend on the accuracy of the auditing technology and non-monotonically on multinational costs. The switch will have different effects on the tax receipts from domestic and foreign firms.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
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.:
- Cremer, H. & Marchand, M. & Pestieau, P., 1990.
"Evading, auditing and taxing : The equity-compliance tradeoff,"
Journal of Public Economics,
Elsevier, vol. 43(1), pages 67-92, October.
- Cremer, H. & Marchand, M. & Pestieau, P., 1988. "Evading, auditing and taxing: the equity-compliance tradeoff," CORE Discussion Papers 1988027, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Cremer, H. & Marchand, M. & Pestieau, P., 1988. "Evading, Auditing And Taxing: The Equity-Compliance Tradeoff," Papers 401, Cornell - Department of Economics.
- 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.
- Cremer, Helmuth & Gahvari, Firouz, 2000. "Tax evasion, fiscal competition and economic integration," European Economic Review, Elsevier, vol. 44(9), pages 1633-1657, October.
- Søren Bo Nielsen & Pascalis Raimondos-Møller & Guttorm Schjelderup, .
"Formula Apportionment and Transfer Pricing under Oligopolistic Competition,"
EPRU Working Paper Series
01-05, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
- S¯ren Bo Nielsen & Pascalis Raimondos-M¯ller & Guttorm Schjelderup, 2003. "Formula Apportionment and Transfer Pricing under Oligopolistic Competition," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 5(2), pages 419-437, 04.
- Søren Bo Nielsen & Pascalis Raimondos-Møller & Guttorm Schjelderup, 2001. "Formula Apportionment and Transfer Pricing under Oligopolistic Competition," CESifo Working Paper Series 491, CESifo Group Munich.
- Nielsen, Søren Bo & Raimondos-Møller, Pascalis & Schjederup, Guttorm, 2000. "Formula Apportionment And Transfer Pricing Under Oligopolistic Competition," Working Papers 18-2000, Copenhagen Business School, Department of Economics.
- Mintz, Jack & Smart, Michael, 2004.
"Income shifting, investment, and tax competition: theory and evidence from provincial taxation in Canada,"
Journal of Public Economics,
Elsevier, vol. 88(6), pages 1149-1168, June.
- Jack Mintz & Michael Smart, 2001. "Income Shifting, Investment, and Tax Competition: Theory and Evidence from Provincial Taxation in Canada," CESifo Working Paper Series 554, CESifo Group Munich.
- Jack M. Mintz & Michael Smart, 2001. "Income Shifting, Investment, and Tax Competition: Theory and Evidence from Provincial Taxation in Canada," International Tax Program Papers 0402, International Tax Program, Institute for International Business, Joseph L. Rotman School of Management, University of Toronto, revised Apr 2003.
- Burbidge, John & Cuff, Katherine & Leach, John, 2006.
"Tax competition with heterogeneous firms,"
Journal of Public Economics,
Elsevier, vol. 90(3), pages 533-549, February.
- 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.
- Hans Jarle Kind & Helene Midelfart & Guttorm Schjelderup, 2004. "Corporate Tax Systems, Multinational Enterprises, and Economic Integration," CESifo Working Paper Series 1241, CESifo Group Munich.
- Michael Devereux, 2004. "Debating Proposed Reforms of the Taxation of Corporate Income in the European Union," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 11(1), pages 71-89, January.
- 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;International Institute of Public Finance, vol. 11(2), pages 199-220, 03.
- 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.
- Peter Sørensen, 2004. "Company Tax Reform in the European Union," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 11(1), pages 91-115, January.
- David P. Baron & David Besanko, 1984. "Regulation, Asymmetric Information, and Auditing," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 447-470, Winter.
- Jack Mintz, 2004. "Corporate Tax Harmonization in Europe: It's All About Compliance," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 11(2), pages 221-234, 03.
When requesting a correction, please mention this item's handle: RePEc:eee:eecrev:v:54:y:2010:i:1:p:133-149. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shamier, Wendy)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.