CCCTB: the employment factor game

Abstract

The draft for a Common Consolidated Corporate Tax Base Directive in the European Union includes the suggestion for an apportionment formula which allocates taxable group profits to group member corporations. These allocated profits shall then be taxed in the respective MemberStates. The draft directive delegates the right to define one factor of the apportionment formula, the term 'Employee' to the Member States, who are therefore free to choose a narrow or a broad definition, the latter including also atypical employment schemes. Using a game-theoretic approach the paper shows that the individually rational strategy of any Member State to define 'Employee' broadly so as to maximize the volume of the apportionment factor and thus maximize the allocated share of taxable income is only the best solution when tax rate differences and differences in the volume of atypical employment schemes are disregarded. If such differentials and the corporate groups' reactions to different Member States' definitions are included in modelling the game's payoffs a narrow definition of 'Employee' yields the highest individual pay-offs to the Member States involved. This change of dominant strategies is triggered by the corporate group's shifting of the employment factor from high-tax to low-tax Member States. Our paper differs from previous research on the economic effects of the CCCTB apportionment formula as it is the first paper identifying and analysing the employment factor and its distorting effects. The paper discusses possible tax minimizing strategies for corporate groups by shifting workforce and develops a model to quantify these potential relocations. Furthermore the paper presents advice to policy makers in their 'Employee' definition decision and shows how Member States could use this definition to both minimize outward factor shifting and maximize inward factor shifting.

Uncertainty in Weighting Formulary Apportionment Factors and its Impact on After-Tax Income of Multinational Groups

“…However, contrary to my study, these studies use specific elements of tax base uncertainty to motivate their research question but do not investigate tax uncertainty in particular. Eberhartinger and Petutschnig (2014) focus on the unclear definition of the term "employee" which is a factor of the apportionment formula under the proposed CCCTB system. Kiesewetter et al (2014), in their analysis, consider room for discretion concerning the apportionment factor "assets".…”

Novel Configuration of Formulary Apportionment Using the Correlated Random Effect Approach

“…The labour factor was addressed by Eberhartinger and Petutschnig (2017) who pointed out that based on the number of employees, the payroll factor can be used to analyse the impacts of different levels of costs of employees on the allocation of consolidated corporate tax base.…”

Tax sharing under the Common Consolidated Corporate Tax Base: Measurement of the profit generating factors in the agriculture sector

“…a full-time permanent worker in one Member State, or to choose rather its boarder definition which includes the part-time contracts, the leased workforce of certain self-employed contractors in the other Member States. Eberhartinger and Petutschnig (2014) applied the game theory approach to analyse which kind of the definition of "employee" will be more beneficial for the respective Member State. Their paper shows that in the situation of the existing tax rate differences, the only rational strategy of the respective Member State is to define "employee" broadly, which allows to maximize the volume of the allocated share of the taxable income.…”