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Tax Revenue Losses through Cross-Border Loss Offset: An Insurmountable Hurdle for Formula Apportionment

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  • Mohammed Mardan
  • Michael Stimmelmayr

Abstract

This paper analyzes the relevance of firm losses for tax revenues and welfare when switching from separate accounting to a system of tax base consolidation with formula apportionment. We find that a system change unambiguously decreases tax revenues in the short run, in which neither firms nor governments can adjust their behavior, due to the cross-border loss offset inherent to formula apportionment. In the medium run, in which only firms can adjust their strategies, tax revenues are still lower under formula apportionment if the probability of incurring losses or the costs of profit shifting are sufficiently small. However, in the long run, where both firms and governments are able to adjust their behavior after the system change, a switch from separate accounting to formula apportionment is beneficial under the aforementioned conditions. Furthermore, we show that a higher weight of input shares in the apportionment formula may mitigate tax competition because, contrary to output factors, input factors provide an insurance against tax revenue shortfalls due to loss-making affiliates.

Suggested Citation

  • Mohammed Mardan & Michael Stimmelmayr, 2017. "Tax Revenue Losses through Cross-Border Loss Offset: An Insurmountable Hurdle for Formula Apportionment," CESifo Working Paper Series 6368, CESifo.
  • Handle: RePEc:ces:ceswps:_6368
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    2. 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.
    3. Javier Garcia-Bernardo & Petr Janský & Thomas Tørsløv, 2022. "Decomposing Multinational Corporations’ Declining Effective Tax Rates," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 70(2), pages 338-381, June.
    4. Mlčúchová Markéta, 2023. "Formulary apportionment in the European Union—future research agenda," Economics and Business Review, Sciendo, vol. 9(3), pages 124-152, October.
    5. Sharma, Rishi R. & Slemrod, Joel & Stimmelmayr, Michael, 2023. "Tax losses and ex-ante offshore transfer of intellectual property," Journal of Public Economics, Elsevier, vol. 226(C).
    6. Koethenbuerger, Marko & Mardan, Mohammed & Stimmelmayr, Michael, 2019. "Profit shifting and investment effects: The implications of zero-taxable profits," Journal of Public Economics, Elsevier, vol. 173(C), pages 96-112.
    7. Chen, Xuyang & Hindriks, Jean, 2023. "Multinational Taxation under Pressure: The Role of Tax Deductibility," LIDAM Discussion Papers CORE 2023013, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).

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    More about this item

    Keywords

    separate accounting; formula apportionment; corporate losses; cross-border loss offset; CCCTB;
    All these keywords.

    JEL classification:

    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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