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Cross-border loss offset can fuel tax competition

Author

Listed:
  • Andreas Hau fler

    (University of Munich and CESifo)

  • Mohammed Mardan

    () (University of Munich)

Abstract

Following recent court rulings, cross-border loss compensation for multinational firms has become a major policy issue in Europe. This paper analyzes the effects of introducing a coordinated cross-border tax relief in a setting where multinational firms choose the size of a risky investment and host countries noncooperatively choose tax rates. We show that coordinated cross-border loss compensation may intensify tax competition when, following current international practice, the parent firm's home country bases the tax rebate for a loss-making subsidiary on its own tax rate. In equilibrium, tax revenue losses may thus be even higher than is implied by the direct effect of the reform. In contrast, tax competition is mitigated when the home country bases its loss relief on the tax rate in the subsidiary's host country.

Suggested Citation

  • Andreas Hau fler & Mohammed Mardan, 2013. "Cross-border loss offset can fuel tax competition," Working Papers 1310, Oxford University Centre for Business Taxation.
  • Handle: RePEc:btx:wpaper:1310
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Wolfram F. Richter, 2017. "Taxing Intellectual Property in the Global Economy: A Plea for Regulated and Internationally Coordinated Profit Splitting," CESifo Working Paper Series 6564, CESifo Group Munich.
    2. Mardan, Mohammed & Stimmelmayr, Michael, 2018. "Tax revenue losses through cross-border loss offset: An insurmountable hurdle for formula apportionment?," European Economic Review, Elsevier, vol. 102(C), pages 188-210.
    3. Kalamov, Zarko Y. & Runkel, Marco, 2016. "On the implications of introducing cross-border loss-offset in the European Union," Journal of Public Economics, Elsevier, vol. 144(C), pages 78-89.
    4. Richter, Wolfram F. & Breuer, Markus, 2016. "Pricing the Transfer of Intellectual Property: A Plea for Regulated and Internationally Coordinated Profit Splitting," Annual Conference 2016 (Augsburg): Demographic Change 145621, Verein für Socialpolitik / German Economic Association.
    5. Brekke, Kurt R. & Garcia Pires, Armando J. & Schindler, Dirk & Schjelderup, Guttorm, 2017. "Capital taxation and imperfect competition: ACE vs. CBIT," Journal of Public Economics, Elsevier, vol. 147(C), pages 1-15.

    More about this item

    Keywords

    cross-border loss relief; tax competition; multinational rms;

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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