Corporate Tax Consolidation and Enhanced Cooperation in the European Union

1. Corporate Tax Consolidation and Enhanced Cooperation in the European Union Leon Bettendorf, Albert van der Horst, Ruud de Mooij & Hendrik Vrijburg

2. Consolidation & Formula Apportionment • European debate on the CCCTB • What is CCCTB? • Proposal prepared by the EC • Previous analysis in Van der Horst (2007) • Evidence from the US and Canada • Distortions of the formula due to tax differences • Endogenous choice of the formula (bias to sales)

3. Enhanced Cooperation Agreements (minimum of 8) • General theory on ECA’s. Countries choose: • Common policy • Division of aggregate gain • Preferred coalition • Results • Welfare improving if within & between spillovers are of the same sign • Strategic complementarity reinforces benefits • Decision to join a coalition depends on country heterogeneity (e.g. preferences, size, etc.) • Vrijburg (2009) • Derives conditions for strategic complementarity • Compares welfare gain from global vs ECA

4. Similarity (in size) mattersblack = ECA; blue = outside; red = global

5. Our analysis • CCCTB with CGE model of EU27, Jap & US • Start from common base • Focus on consolidation & formula apportionment • Focus: allocative efficiency & distribution • No attention to compliance costs • No dynamic adjustment • Include capital, profit & loss allocation across borders • Consider only one common policy • CCCTB with consolidation of profits & losses • One formula with 1/3 Labour, 1/3 Assets, 1/3 Output • Alternative options to balance the government budget

6. CORTAX: for each countryCalibrated for 2005 - 2007 Domestic firm Multinational Government National Labour Foreign Goods & Capital Households

7. Firms • Two types of firms • Domestic & Multinational (Parent & 28 subsidiaries) • Choose optimal factor input (cost of capital concept) • Multinationals • Maximize value of the entire group • Chooses optimal FDI in each location • Size of subsidiaries calibrated on FDI stock data • Intrafirm trade at endogenous transfer price • Linear tax gain from deviating from arms length • Convex cost to deviating from arms length

8. From Seperate Accounting to Formula Apportionment • Affects allocation of capital across countries & FDI by MNEs • Violation of Capital Export Neutrality • Affects profit shifting by MNEs • Affects the value of losses • Loss carry forward is less valuable for firms than loss consolidation (i.e. immediate loss offset) • Make assumption of full loss offset in the model compared to partial offset under carry forward

9. Government budget constraint Balanced-budget analysis Transfers Corporate taxes Labour taxes Welfare Equivalent Variation Government

10. Ex-ante revenue effects • Ex-ante tax relief due to loss consolidation • Ex-ante redistribution under the 1/3 formula

11. CCCTB in EU27

12. CCCTB in winning countriesEffects relative to EU-wide reform

13. CCCTB in countries with small MNE sectorEffects relative to EU-wide reform

14. CCCTB in countries with large MNE sectorEffects relative to EU-wide reform

15. Lessons • CCCTB yields small aggregate welfare gains • Mainly through loss consolidation • CCCTB causes a redistribution of welfare • ECA among the subset of winning countries may introduce new losing countries • Adverse selection may render an ECA infeasible • ECA among similar countries may be more attractive for them than EU-wide cooperation • Similar in size (theory) importance of MNE’s (model) • Qualifications to the results • Ignore the impact of compliance costs • Ignore impact of CCCTB on tax competition • Distribution depends on choice of formula • Distribution/efficiency depend on choice of common base