Advertisement

How accurately does the CCCTB apportionment formula allocate profits? An evaluation of the European Commission proposal

  • Jochen HundsdoerferEmail author
  • Julia Wagner
Original Paper
  • 33 Downloads

Abstract

The European Commission has been setting the course for an EU-wide reform of the traditional corporate tax system of separate accounting (SA) to a unitary taxation with formula apportionment (FA). The underlying claim of this formula is that it allocates profits more precisely than SA to the country where the value is created, as SA can be distorted by intra-group profit shifting. We analyze and evaluate the proposed CCCTB apportionment formula in terms of how well FA approximates the “undistorted” profit. After identifying potential determinants of misapportionment in the CCCTB formula, we test the formula empirically by randomly grouping pairs of European groups to fictitious metagroups. We allocate profits to the metagroup members according to the formula and compare the apportioned FA profit with the observed SA profit (our proxy for “undistorted” profit). We find huge profit misallocations under FA. Restricting the sample to metagroup years with positive profit of each metagroup member, the mean negative (positive) profit deviation is − 4.2% (6.2%) of total assets. Compared to the mean return on assets of the sample, this results in an average error of − 49.5% or + 74.1%, respectively. The deviation caused by FA is systematic. The main drivers for profit misallocations are the profitability of a firm as well as the within-group heterogeneity in firm size and in profitability. The inclusion of loss years shows that loss firms would suffer from considerable additional tax payments under FA. An adjustment of the apportionment weights would slightly increase the performance of the formula. All in all, the CCCTB apportionment formula performs remarkably badly.

Keywords

Corporate taxation Formula apportionment Common consolidated corporate tax base MNE taxation 

JEL Classification

H25 H32 M16 M48 

Notes

Acknowledgements

We thank three anonymous reviewers, Frank Hechtner, Eva Matthaei, Carla Pöschel, the participants of the joint Otto-von-Guericke-Universität Magdeburg/Freie Universität Berlin doctoral taxation seminar 2017 and the participants of the Schmalenbach Gesellschaft Transfer Pricing section meeting 2019 for their helpful comments and advice.

References

  1. Agúndez-García A (2006) The delineation and apportionment of an EU consolidated tax base for multi-jurisdictional corporate income taxation: a review of issues and options. European Commission Taxation Working Paper No. 9/2006. Luxembourg 2006Google Scholar
  2. Altshuler R, Grubert H (2010) Formula apportionment: is it better than the current system and are there better alternatives? Natl Tax J 63:1145–1184CrossRefGoogle Scholar
  3. Álvarez-Martinez MT, Barrios S, d’Andria D, Gesualdo M, Pontikakis D, Pycroft J (2016) Modelling corporate tax reform in the EU: New simulations with the CORTAX model. JRC working papers on taxation and structural Reforms No 8/2016. Seville 2016Google Scholar
  4. Anand BN, Sansing R (2000) The weighting game: formula apportionment as an instrument of public policy. Natl Tax J 53:183–200CrossRefGoogle Scholar
  5. Becker J, Fuest C (2010) Tax enforcement and tax havens under formula apportionment. Int Tax Public Financ 17:217–235CrossRefGoogle Scholar
  6. Clausing KA (2016) The U.S. state experience under formulary apportionment: are there lessons for international reform? Natl Tax J 69:353–386CrossRefGoogle Scholar
  7. Cobham A, Loretz S (2014) International distribution of the corporate tax base: implications of different apportionment factors under unitary taxation. ICTD Working Paper 27. Brighton 2014Google Scholar
  8. Devereux MP, Loretz S (2008) The effects of EU formula apportionment on corporate tax revenues. Fiscal Stud 29:1–33CrossRefGoogle Scholar
  9. Eichfelder S, Hechtner F, Hundsdoerfer J (2018) Formula apportionment: factor allocation and tax avoidance. Eur Account Rev 27:649–681CrossRefGoogle Scholar
  10. European Commission (2007a) An overview of the main issues that emerged during the discussion on the mechanism for sharing the CCCTB. CCCTB/WP052\doc\en. Brussels 2007Google Scholar
  11. European Commission (2007b) CCCTB: possible elements of the sharing mechanism. CCCTB/WP060\doc\en. Brussels 2007Google Scholar
  12. European Commission (2011) Proposal for a council directive on a common consolidated corporate tax base (CCCTB). COM (2011) 121 final. Brussels 2011Google Scholar
  13. European Commission (2015) Communication from the Commission to the European Parliament and the Council—A Fair and Efficient Corporate Tax System in the European Union: 5 Key Areas for Action. COM (2015) 302 final. Brussels 2015Google Scholar
  14. European Commission (2016) Proposal for a council directive on a common consolidated corporate tax base (CCCTB). COM (2016) 683 final. Strasbourg 2016Google Scholar
  15. Fuest C (2008) The European Commission’s proposal for a common consolidated corporate tax base. Oxf Rev Econ Policy 24:720–739CrossRefGoogle Scholar
  16. Fuest C, Hemmelgarn T, Ramb F (2007) How would the introduction of an EU-wide formula apportionment affect the distribution and size of the corporate tax base? An analysis based on German multinationals. Int Tax Public Financ 14:605–626CrossRefGoogle Scholar
  17. Goolsbee A, Maydew EL (2000) Coveting thy neighbor’s manufacturing: the dilemma of state income apportionment. J Public Econ 75:125–143CrossRefGoogle Scholar
  18. Gordon R, Wilson JD (1986) An examination of multijurisdictional corporate income taxation under formula apportionment. Econometrica 54:1357–1373CrossRefGoogle Scholar
  19. Grazzi M, Piccardo C, Vergari C (2017) Building a firm level dataset for the analysis of industrial dynamics and demography. Università di Bologna Department of Economics Quaderni—Working Paper DSE N°2003/2017Google Scholar
  20. Griliches Z, Mairesse J (1999) Production functions: the search for identication. In: Steiner S (ed) Econometrics and economic theory in the twentieth century: the Ragner Frisch Centennial Symposium. Cambridge University Press, CambridgeGoogle Scholar
  21. Gupta S, Hofmann MA (2003) The effect of state income tax apportionment and tax incentives on new capital expenditures. J Am Tax Assoc 25:1–25CrossRefGoogle Scholar
  22. Heckemeyer JH, Overesch M (2017) Multinationals’ profit response to tax differentials: effect size and shifting channels. Can J Econ 50:965–994CrossRefGoogle Scholar
  23. Hines JR Jr (2010) Income misattribution under formula apportionment. Eur Econ Rev 54:108–120CrossRefGoogle Scholar
  24. Kiesewetter D, Steigenberger T, Stier M (2018) Can formula apportionment really prevent multinational enterprises from profit shifting? The role of asset valuation, intragroup debt, and leases. J Bus Econ 88:1029–1060Google Scholar
  25. Klassen KJ, Shackelford DA (1998) State and provincial corporate tax planning: income shifting and sales apportionment factor management. J Account Econ 25:385–406CrossRefGoogle Scholar
  26. Krchnivá K (2015) The Czech evidence for the explanatory power of formula factors on profitability. In: Ekonomická revue – Central European Review of Economic Issues 18:131–138Google Scholar
  27. McLure CE Jr (1981) The elusive incidence of the corporate income tax: the state case. Public Financ Q 9:395–413CrossRefGoogle Scholar
  28. Mintz J, Smart M (2004) Income shifting, investment, and tax competition: theory and evidence from provincial taxation in Canada. J Public Econ 88:1149–1168CrossRefGoogle Scholar
  29. OECD (2015) Measuring and monitoring BEPS—action 11–2015 final report. OECD Publishing, ParisGoogle Scholar
  30. Oestreicher A, Koch R (2011) The revenue consequences of using a common consolidated corporate tax base to determine taxable income in the EU member states. In: FinanzArchiv/Public Finance Analysis, 67(1):64–102CrossRefGoogle Scholar
  31. Ortmann R, Pummerer E (2015) Formula apportionment or separate accounting? Tax-induced distortions of multinationals’ location investment decisions. WU International Taxation Research Paper Series No. 2015—28. Vienna 2015Google Scholar
  32. Ortmann R, Sureth-Sloane C (2016) Can the CCCTB alleviate tax discrimination against loss-making European multinational groups? J Bus Econ 86:441–475Google Scholar
  33. Riedel N (2010) The downside of formula apportionment: evidence on factor demand distortions. Int Tax Public Financ 17:236–258CrossRefGoogle Scholar
  34. Riedel N, Runkel M (2007) Company tax reform with a water’s edge. J Public Econ 91:1533–1554CrossRefGoogle Scholar
  35. Roggeman A, Verleyen I, Van Cauwenberge P, Coppens C (2012) An empirical investigation into the design of an EU apportionment formula related to profit generating factors. In: Transformations in business and economics, Vol 11, No 3(27):36–56Google Scholar
  36. Weiner JM (2005) Formulary apportionment and group taxation in the European Union: insights from the United States and Canada. In: European Commission Taxation Working Paper No. 8/2005. Luxembourg 2005Google Scholar

Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2019

Authors and Affiliations

  1. 1.Freie Universität BerlinBerlinGermany
  2. 2.Arbeitskreis Quantitative Steuerlehre arqus e.V.BerlinGermany
  3. 3.Norwegian Centre for TaxationBergenNorway

Personalised recommendations