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Cross-border loss offset can fuel tax competition

  • Andreas Hau fler

    (University of Munich and CESifo)

  • Mohammed Mardan

    ()

    (University of Munich)

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.

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Paper provided by Oxford University Centre for Business Taxation in its series Working Papers with number 1310.

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Date of creation: 2013
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Handle: RePEc:btx:wpaper:1310
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