International Distribution of the Corporate Tax Base: Implications of Different Apportionment Factors Under Unitary Taxation

Abstract

SummaryUnder the current system of separate accounting, tax-motivated international profit shifting results in misalignment of profits and real economic activity. While the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting initiative aims to measure and curtail this, critics claim serious progress is only possible with greater emphasis on formulary apportionment methods (Picciotto 2013), or other methods outside the present international tax architecture (IMF 2014). In this paper we use the leading global database of company balance sheets to compare the distribution of profit and potential apportionment factors. Although data coverage is problematic for developing countries, we find that apportioning profit according to measures of actual economic activity would result in a major redistribution of the tax base at the expense of a particular group of jurisdictions, and in most cases towards the lower-income countries in the sample. International loss consolidation facilitated by a global switch to unitary taxation would reduce the overall tax base by around 12 per cent.

Tax revenue losses through cross-border loss offset: An insurmountable hurdle for formula apportionment?

“…Specifically, the tax base consolidation under FA mechanically reduces tax revenues due to the inherent cross-border loss offset under FA. This finding is in line with empirical studies by Fuest et al (2007) and Cobham and Loretz (2014), which analyze the tax base consequences resulting from a cross-border loss offset when switching from SA to FA.…”

“…They find that a switch in the tax system from SA to FA results in a decline of the corporate tax base by 20%. Cobham and Loretz (2014), who make use of the Orbis database over the period 2003-2011 and which comprises data of all registered companies worldwide, estimate a drop in the corporate tax base by more than 10% in response to the system switch. Importantly, these estimates solely reflect the decline in the corporate tax base associated with the possibility of making use of the cross-border loss offset.…”

“…The consolidation of cross-border profits and losses is, on the one hand, seen as an enormous step towards the elimination of a major obstacle of cross-border business activities. 2 On the other hand, the significance of loss-making affiliates suggests substantial negative tax revenue consequences (see Fuest et al, 2007;Cobham and Loretz, 2014) and thus a potentially insurmountable hurdle for the implementation of the CCCTB.…”

Corporation tax as a problem of MNC organisational circuits: The case for unitary taxation

“…The real issue is what set of problems would one prefer to be dealing with and when in the process of reform is it appropriate to be doing so? Unitary taxation creates an initial challenge in terms of establishing clear rules for the application of an apportionment formula (see Cobham and Lopez, 2014). But its historical record should not confuse the potential of unitary taxation.…”

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

“…At present, some researchers are focusing on the evaluation of the allocation formula for the distribution of the common consolidate corporate tax base as is designed by Art 86 of the CCCTB Draft Directive (Runkel and Schejelderup 2007;Hines 2008;McLure 2008;Roggeman et al 2011;Cobham and Loretz 2014).…”