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Some Open Negotiation Issues Involving a CCCTB in the EU

Some Open Negotiation Issues Involving a CCCTB in the EU. Jack Mintz and Joann Weiner NYU – UConn EC Tax Symposium March 14, 2008. The CCCTB in the EU . A new era of company taxation in the EU Common Consolidated Corporate Tax Base Formulary Apportionment

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Some Open Negotiation Issues Involving a CCCTB in the EU

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  1. Some Open Negotiation Issues Involving a CCCTB in the EU Jack Mintz and Joann Weiner NYU – UConn EC Tax Symposium March 14, 2008

  2. The CCCTB in the EU • A new era of company taxation in the EU • Common Consolidated Corporate Tax Base • Formulary Apportionment • Pressures to coordinate tax policies coming from the ECJ, globalization, tax competition • Business pressure to have an option • Apply a new cooperative approach

  3. Game Theory • EU member states are players • Each player chooses and action and strategy to maximize payoffs • Gov’t payoffs are revenue, efficiency gains, and distributive impacts • Game is finite, but it is repeated • Players have incomplete information

  4. Characteristics of a cooperative game • Pareto-optimality - can’t improve on the outcome • Coalition-stability - subset can not block • Individual rationality - cooperation better than competition • Side-payments - expands possible outcomes

  5. EU Examples of Cooperative Game • MS reach an agreement that can not make one better with making another worse off • Sub-set of MS can proceed with enhanced cooperation • Each MS enters agreement only if it does better from its point of view • Commission can make side-payments to encourage cooperation

  6. Non-cooperative outcome • MS act independently with fiscal policies • Tax rates may be too high or too low • Public services may be too high or too low • Can have a “leader” who moves first and leads to subgame perfect equilibrium

  7. The players • Do players include private sector and citizens? • Could private sector block the cooperative agreement if not included in the process? • Which governments participate? • Who are the residents and qualified to play? • Which rules determine residency? • Permanent establishment • Central management and control • Carrying on a business

  8. The payoffs • What do govts maximize: ---- welfare of their citizens? ---- tax revenue, i.e., are they Leviathan? ---- political rents? • How do govts interact with one another? • Global or national objectives?

  9. Negotiations and Fairness • Reciprocity • Nash bargaining game • Maximize the aggregate product of welfare gains from cooperation • Weights determined by bargaining strengths • Participants care about how tax base is shared

  10. Rules of the Game • No explicit international tax rules exist • Aim is to allocate worldwide tax base among sovereign jurisdictions • Avoid double taxation • Solution can not require complete harmonization

  11. Current state of play • EU Commission plans to issue proposal later this year • Optional CCCTB with common formula • MS set national tax rates

  12. The formula • Commission supports multiple factor formula • Include tangible property, number of employees, and employee compensation • Considerable uncertainty about including sales, whether on destination or an origin basis

  13. The territorial scope • Worldwide with exemption • Subject to a switch-over clause • Alternative to CFC rules, which ECJ has rejected • Over-ride existing intra-EU treaties • Renegotiate external treaties

  14. The apportionment formula • Balance interests of divergent member states • Factors should be easy to locate, hard to manipulate, related to income • US states use variety of formulae with property, payroll and sales • Many states apportion solely on sales • Canadian provinces use common two-factor payroll and sales

  15. Tax rates • Narrow range of rates in the US • Wider range of rates in the EU • Distortions will not be the same given different levels of rates and distribution of investment

  16. Development of the formula • States, which may freely choose formula, opt for one that maximizes “business climate” • Most common formula is double-weighted sales • Provinces can not choose formula • 50 years of stability leads to desire to maintain certainty

  17. Unresolved issues • Sales: Should they be included? • If included, should they measured at origin or destination? • How to prevent income-shifting?

  18. Unresolved issues • Intangibles • How to locate? • How to measure?

  19. An alternative formula to consider • Divide each factor into two parts • Labor: Number of employees and compensation • Property: Tangible and intangible property • Sales and gross receipts: Destination and Origin

  20. Economic Impacts • Distribution of US multinational operations • Distribution of a single company’s operations • Revenue

  21. Possible revenue effects • Devereux and Loretz • EU multinational company data from orbis • 2000 to 2004 • Ven der Horst, Betterndorf, and Rojas-Romagosa • General Equilibrium model

  22. Conclusion • EU is moving in the right direction in company tax reform with a CCCTB and FA • EU MS may be able to reach a cooperative outcome

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