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TAXBEN WP2 on Corporate taxation in the EU

TAXBEN. TAXBEN WP2 on Corporate taxation in the EU. by CEPII and CPB Albert van der Horst. Competition in tax rates stylised facts. Change in corporate income taxation (1982-2001) CIT declines other taxes bear part of the burden of CIT-reductions. TAXBEN.

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TAXBEN WP2 on Corporate taxation in the EU

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  1. TAXBEN TAXBEN WP2onCorporate taxation in the EU by CEPII and CPB Albert van der Horst

  2. Competition in tax ratesstylised facts • Change in corporate income taxation (1982-2001) • CIT declines • other taxes bear part of the burden of CIT-reductions TAXBEN

  3. Competition in tax ratesMajor challenges • CIT is needed for • tax revenues • tax excess profits (like agglomeration rents) • backstop for personal taxation • Does tax competition erode the tax base? • Who benefits from tax competition? • how does it affect the economy? • does it reduce distortions in investment and firm location? TAXBEN

  4. Divided tax basethe problem • Corporate income tax distortions: • profit shifting • lack of loss compensation (Marks & Spencer) • compliance costs • Common cause: separate accounting TAXBEN

  5. Divided tax basethe problem separate accounting: each part of the cake is treated separately profits of a MNE cake: taxable corporate income of MNE earned in different member states TAXBEN

  6. Divided tax basethe solution • The problem: separate accounting • Proposed solution (Bolkestein report): consolidation consolidation: one big cake TAXBEN

  7. to formula apportionmentthe solution? separate accounting consolidation with formula apportionment: big cake is divided over member states consolidation: one big cake

  8. Policy stance • consolidation + reduce compliance costs + eliminate paper profit shifting + loss compensation – overrules tax autonomy of member states • formula apportionment + restores tax autonomy of member states – distorts production (*) – uneven treatment of domestic & multinational firms (*) : FA provide firms incentives to affect the tax bill by reallocating production or sales to low-tax countries

  9. The deliverables • CEPII • Who’s afraid of tax competition? • by Amina Lahrèche-Révil • Do EU member states compete on social systems? • by Vincent Delbecque and Amina Lahrèche-Révil • CPB • Who benefits from tax competition in the European Union? • by Leon Bettendorf, Joeri Gorter and Albert van der Horst • Consolidation and formula apportionment in the European Union • by Albert van der Horst, Leon Bettendorf and Hugo Rojas-Romagosa TAXBEN

  10. TAXBEN CEPII

  11. Methodology (CEPII) • Do taxes determine Foreign Direct Investment .. • in Europe • in particular, in the new member states? • .. or are other determinants more important? • FDI flows (1990-2002) • from EU15 (12 countries) • to EU25 (18-22 countries) TAXBEN

  12. Methodology (CEPII) • FDI flows depend on: • GDP (in home and host country) and distance • Tax differentials • Statutory tax rate • Effective average tax rate • Implicit tax rate: tax revenue/tax base • Unit labor cost differentials • Labour market institutions • Panel estimation of gravity equation TAXBEN

  13. Tax differentials and FDI Main econometric results • Tax differentials mostly affect FDI to the EU15 • semi elasticity about -5 • Impact on FDI in NMS mostly insignificant • Decreasing marginal returns to tax-cutting strategies TAXBEN

  14. Scenario: strict harmonisation

  15. Labour market institutions Stylised facts • What does determine FDI in NMS, if taxes don’t? • labour market institutions?

  16. Labour market institutions: Stylised facts • Falling employment protection • Rising union coverage

  17. Labour market institutions and FDI

  18. Labour market institutions and FDI Simulations • Increasing New Member States employment protection to EU15 mean level would reduce FDI inflows in NMS by 25% on average • A 10% increase in union bargaining coverage reduces FDI inflows in NMS by 32% on average • Social competition perhaps more powerful than tax competition TAXBEN

  19. TAXBEN CPB

  20. Methodology (CPB) • Who gains from coordination or consolidation? • Applied general equilibrium model (CORTAX) • Applied to Europe (and includes US) • 14 old member states (BEL and LUX joined) • 3 new member states (CZE, HUN, POL) • US • Focus on corporate taxation • separate accounting with paper profit shifting or • consolidation & formula apportionment with reallocation TAXBEN

  21. Structure of the modelthe actors Domestic firms Multinationals Government Foreign Households TAXBEN

  22. Structure of the modeltheir acts reallocation Domestic firms Multinationals FDI profit shifting reallocation tax on corporate income Government Foreign tax on labour income & consumption wage income dividends Households TAXBEN

  23. Methodology (2) • Pros • applied to EU member states • interaction between countries • interaction between firms (domestic & MNEs) • interactions between households, firms and government • welfare analysis: Who gains from coordination or consolidation? • Cons • stylised • but differences in statutory rates and depreciation allowances are included • only long term (steady state) TAXBEN

  24. Findings - competition (2) • Who benefits from an unilateral reduction of the CIT rate? • where reduction in tax revenues are compensated with higher taxes on consumption or labour TAXBEN

  25. Findings - competition (2) • Tax competition is not a big issue • impact on FDI is limited (see estimations of CEPII) • only very open economies benefit a lot from (or are harmed by) profit shifting • loss of CIT revenues is costly TAXBEN

  26. Findings - consolidation • Consolidation • benefits all countries • in particular those with many MNEs (BLU, NLD, SWE) • CCBT treats tax base domestic firms and MNEs differently • harmful for countries with small tax bases (GRC, ITA) TAXBEN

  27. Findings - formula apportionmentformula with equal weights on L, K and Y • Strong incentive for reallocation • up to 15% of labour force is shifted from domestic firms to MNEs (or vice versa) • in countries with low (high) tax rates • Large impact on profitability of MNEs (+ / – 30%) and domestic firms • Large change in tax revenues (between -0.4,+0.4%GDP) • depending on country characteristics • and on apportionment formula • Small or no welfare gain for EU on average • both winners and losers TAXBEN

  28. Findings - consolidation • Who benefits from consolidation (CCBT) with formula apportionment? • welfare gain (%GDP) - averaged over member states TAXBEN

  29. Consolidation • Consolidation improves efficiency • but may distort level playing field • Formula apportionment • preserves tax autonomy • induces tax planning • via reallocation of production or sales • Who gains & loses? • average gain is small – variation is large • depends on type of consolidation (HST <-> CCBT) • depends on apportionment formula • (`poor’ countries gain with an employment-based formula) TAXBEN

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