Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. This paper analyzes the implications of foreign firm ownership and international profit shifting through thin capitalization for corporate tax policy. We consider a model of interjurisdictional tax competition where the corporate tax serves as a backstop to the personal income tax, interest on debt is deductible from the corporate tax base and multinational firms may shift profit across countries through thin capitalization. We show that the problem of thin capitalization induces countries to reduce their corporate tax rates below the personal income tax rate and to broaden their tax bases. Moreover, foreign firm ownership leads to a reduction in corporate tax rates. We also show that there is scope for welfare enhancing tax coordination in our model. In the presence of both foreign firm ownership and thin capitalization, countries gain from a coordinated increase in corporate tax rates or from a coordinated broadening of the tax base. Terms of use: Documents inJEL Classification: H21, H77, G32.

EU tax base, Formula apportionment, Multinational companies,

No abstract

The tax deductibility of interest payments in most corporate income tax systems coupled with no such measure for equity financing creates economic distortions and exacerbates leverage. This paper discusses the consequences of this debt bias and the possible remedies.JEL classification: H25, H32, G21, G32

This paper analyses the effects of introducing a common EU tax base with formula apportionment on the size of the EU wide tax base and on the distribution of the tax base between the EU member countries. We use a combined dataset of Deutsche Bundesbank's Foreign Direct Investment data (MiDi) and corporate balance sheet data (Ustan and Hoppenstedt) for the tax base estimations. The data is used to construct i) a separate accounting and ii) a formula apportionment tax base for the firms in the sample. Our results suggest that due to border crossing loss-offset, the EU wide corporate tax base represented by our data sample shrinks significantly. Smaller countries which are usually considered to attract book profits under the current system, i.e. Ireland and the Netherlands, tend to lose a larger part of their tax base than larger countries like Germany, Italy, France or Great Britain. However, these results should be evaluated in the light of the limitations of the data used in this study since our analysis is based on German FDI data only. Furthermore, the calculations do not take into account behavioural responses of companies caused by such a system change. In its 2001 report on company taxation in the internal market, the EU commission proposed the introduction of a common European tax base which would be apportioned to the member states according to some formula which accounts for economic activity in terms of sales, property and employment. A common tax base is meant to reduce the compliance costs of multinational companies caused by having to deal with many different national tax rules and moreover to limit the possibility to shift book profits by using transfer prices. This paper is a first approach to analyse the effects of introducing a common EU tax base with formula apportionment on the size of the EU wide tax base and the distribution of the tax base between the EU member countries. This is a difficult task since there is no database available for Europe as a whole. For this reason we concentrate on German data in our approach. Note that we can only analyse the part of an EU tax base that is made up by German companies and their foreign affiliates. Such an approach is justifiable if we assume that the distribution of losses and profits of German multinational companies is similar to that of multinational companies from other EU countries. We use a combined dataset of Deutsche Bundesbank's Foreign Direct Investment data (MiDi) and corporate balance sheet data (Ustan and Hoppenstedt) for the tax base estimations. The data is used to construct i) a separate accounting tax base and ii) a formula apportionment tax base for the sample period 1996 to 2001. We compare these two tax bases for each country and for the EU15. The results suggest that smaller countries, in particular those which are usually considered to attract book profits under the current system, i.e. Ireland, Belgium, and the Netherlands, lose a significant part of their tax base, while larger countries lose less tax base. If only the effect o...