IDEAS home Printed from https://ideas.repec.org/a/prg/jnlpol/v2024y2024i1id1411p73-101.html
   My bibliography  Save this article

Novel Configuration of Formulary Apportionment Using the Correlated Random Effect Approach

Author

Listed:
  • Markéta Mlčúchová

Abstract

This paper examines various configurations of the formula under the formulary apportionment methodology from the perspective of the explanatory power of the variability in profitability of multinational companies with the aim to identify the best-performing formula based on analytical evidence of panel microeconomic data. The considered configurations of the formula are based on the novel composition of the allocation formula indicated under the BEFIT proposal, preceding the CCCTB proposal, and traditionally used formulas, at the sub-national level, in Canada and the United States. The empirical analysis uses microeconomic panel data obtained from the Orbis database for 77,087 subsidiaries affiliated with 2,283 parent companies observed from 2011 to 2020. Utilising the correlated random effect approach, accounting for time-specific effects, including the time-constant explanatory variables such as economic activity, classified by NACE codes and the EU Member States' jurisdiction, this paper devises a novel formula configuration. Besides a novel configuration of the apportionment formula, consisting of sales, costs of employees, tangible and intangible assets, this paper estimates proportional weights of apportionment factors and concludes with policy recommendations.

Suggested Citation

  • Markéta Mlčúchová, 2024. "Novel Configuration of Formulary Apportionment Using the Correlated Random Effect Approach," Politická ekonomie, Prague University of Economics and Business, vol. 2024(1), pages 73-101.
    • Handle: RePEc:prg:jnlpol:v:2024:y:2024:i:1:id:1411:p:73-101
    DOI: 10.18267/j.polek.1411
    as

    Download full text from publisher

    File URL: http://polek.vse.cz/doi/10.18267/j.polek.1411.html
    Download Restriction: free of charge
    File URL: http://polek.vse.cz/doi/10.18267/j.polek.1411.pdf
    Download Restriction: free of charge
    File URL: https://libkey.io/10.18267/j.polek.1411?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. 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;International Institute of Public Finance, vol. 5(1), pages 41-59, February.
    2. Altshuler, Rosanne & Grubert, Harry, 2010. "Formula Apportionment: Is It Better Than the Current System and Are There Better Alternatives?," National Tax Journal, National Tax Association;National Tax Journal, vol. 63(4), pages 1145-1184, December.
    3. Annelies Roggeman & Isabelle Verleyen & Philippe Van Cauwenberge & Carine Coppens, 2013. "The EU apportionment formula: insights from a business case," Journal of Business Economics and Management, Taylor & Francis Journals, vol. 14(2), pages 235-251, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. repec:prg:jnlpol:v:preprint:id:1411 is not listed on IDEAS
    2. Wildasin, David E., 2010. "State Corporation Income Taxation: An Economic Perspective on Nexus," National Tax Journal, National Tax Association;National Tax Journal, vol. 63(4), pages 903-924, December.
    3. Dirk Kiesewetter & Tobias Steigenberger & Matthias Stier, 2018. "Can formula apportionment really prevent multinational enterprises from profit shifting? The role of asset valuation, intragroup debt, and leases," Journal of Business Economics, Springer, vol. 88(9), pages 1029-1060, December.
    4. Eichfelder, Sebastian & Hechtner, Frank & Hundsdoerfer, Jochen, 2017. "Formula apportionment: Factor allocation and tax avoidance," arqus Discussion Papers in Quantitative Tax Research 220, arqus - Arbeitskreis Quantitative Steuerlehre, revised 2017.
    5. Mlčúchová Markéta, 2023. "Formulary apportionment in the European Union—future research agenda," Economics and Business Review, Sciendo, vol. 9(3), pages 124-152, October.
    6. Eichfelder, Sebastian & Hechtner, Frank & Hundsdoerfer, Jochen, 2015. "Formula apportionment: Factor allocation and tax avoidance," arqus Discussion Papers in Quantitative Tax Research 199, arqus - Arbeitskreis Quantitative Steuerlehre.
    7. Eichfelder, Sebastian & Hechtner, Frank & Hundsdoerfer, Jochen, 2015. "Formula apportionment: Factor allocation and tax avoidance," Discussion Papers 2015/30, Free University Berlin, School of Business & Economics.
    8. Martini, Jan Thomas & Niemann, Rainer & Simons, Dirk, 2016. "Tax-induced distortions of effort and compensation in a principal-agent setting," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 27(C), pages 26-39.
    9. Ruud De Mooij & Li Liu & Dinar Prihardini, 2021. "An Assessment of Global Formula Apportionment," National Tax Journal, University of Chicago Press, vol. 74(2), pages 431-465.
    10. Hines Jr., James R., 2010. "Income misattribution under formula apportionment," European Economic Review, Elsevier, vol. 54(1), pages 108-120, January.
    11. Jennifer Bruner & Dylan G. Rassier & Kim J. Ruhl, 2018. "Multinational Profit Shifting and Measures throughout Economic Accounts," NBER Chapters, in: Challenges of Globalization in the Measurement of National Accounts, pages 153-205, National Bureau of Economic Research, Inc.
    12. Martini, Jan-Thomas & Niemann, Rainer & Simons, Dirk, 2014. "Management incentives under formula apportionment: Tax-induced distortions of effort and compensation in a principal-agent setting," arqus Discussion Papers in Quantitative Tax Research 168, arqus - Arbeitskreis Quantitative Steuerlehre.
    13. Dietrich, Maik, 2009. "Entscheidungswirkungen einer europaweit harmonisierten Konzernbesteuerung [Impacts of European Group Taxation]," MPRA Paper 59870, University Library of Munich, Germany.
    14. Dąbroś Wojciech & Kudła Janusz, 2020. "The voting of EU members for common consolidated corporate tax base and the tax benefits," Central European Economic Journal, Sciendo, vol. 7(54), pages 56-71, January.
    15. Marion, Justin & Muehlegger, Erich, 2018. "Tax compliance and fiscal externalities: Evidence from U.S. diesel taxation," Journal of Public Economics, Elsevier, vol. 160(C), pages 1-13.
    16. Harry Grubert & Rosanne Altshuler, 2013. "Fixing the System: An Analysis of Alternative Proposals for the Reform of International Tax," National Tax Journal, National Tax Association;National Tax Journal, vol. 66(3), pages 671-712, September.
    17. Dhammika Dharmapala, 2016. "The economics of corporate and business tax reform," Working Papers 1604, Oxford University Centre for Business Taxation.
    18. Jan Thomas Martini & Rainer Niemann & Dirk Simons, 2014. "Management Incentives under Formula Apportionment - Tax-Induced Distortions of Effort and Compensation in a Principal-Agent Setting -," CESifo Working Paper Series 4908, CESifo.
    19. Fatih Guvenen & Raymond J. Mataloni Jr. & Dylan G. Rassier & Kim J. Ruhl, 2022. "Offshore Profit Shifting and Aggregate Measurement: Balance of Payments, Foreign Investment, Productivity, and the Labor Share," American Economic Review, American Economic Association, vol. 112(6), pages 1848-1884, June.
    20. Michael P. Devereux & Simon Loretz, 2008. "The Effects of EU Formula Apportionment on Corporate Tax Revenues," Fiscal Studies, Institute for Fiscal Studies, vol. 29(1), pages 1-33, March.
    21. Julio López Laborda & Jorge Onrubia, 2019. "Los retos de la fiscalidad societaria en la era de la economía digital: el estado de la cuestión," Policy Papers 2019-04, FEDEA.

    More about this item

    Keywords

    Corporate taxation; formulary apportionment; correlated random effect;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • K34 - Law and Economics - - Other Substantive Areas of Law - - - Tax Law

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:prg:jnlpol:v:2024:y:2024:i:1:id:1411:p:73-101. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Stanislav Vojir (email available below). General contact details of provider: https://edirc.repec.org/data/uevsecz.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.