The Eu Apportionment Formula: Insights From a Business Case

Abstract

In this paper we use firm level data from a listed multinational to investigate how several designs for the Common Consolidated Corporate Tax Base (CCCTB) formula could affect the allocation of the consolidated tax base. The design is relevant in the light of member states’ concern for protecting their tax revenues, as well as for the multinational companies’ tax minimizing possibilities. Moreover, it plays an important role in achieving an efficient and simple tax system. Simulating different apportionment formulas, the results show that including more factors and using more equal weights distributes the common tax base more equally, which could reduce the incentive to shift factors from high to low tax countries. The results also indicate that simplifying the factor definitions, leads to rather minor changes in the allocation. Using unpublished data, this study allows to investigate the consequences of different formulas in detail, which contributes to the current discussion on corporate tax harmonization in the EU.

Novel Configuration of Formulary Apportionment Using the Correlated Random Effect Approach

“…Altshuler and Grubert (2010) stated that the general problem with the FA is the potential asymmetry between the determinants of taxable income and the factors that enter the FA. Roggeman et al (2013) studied several configurations of the FA, concluding that to create an efficient FA and reduce multinational companies' incentive to profit shifting, more factors with more equal weights should be included. McLure (1981) argued that the FA methodology largely transforms the corporate income tax into a direct tax on the factors applied in the FA.…”

“…McLure (2000) addressed the choice of FA factors with regard to digitalized economy based on new types of value-creating assets and problematic application of the traditional nexus. Roggeman et al (2012) discussed and empirically tested the inclusion of intangible assets in the FA. Later, Martins and Taborda (2022) debated the recognition of intangible assets and concluded that they should, in principle, be introduced in the FA.…”

“…The European Commission builds on the Massachusetts formula and by extending the labour factor with the number of employees (reflecting the relatively lower wages especially in Central and Eastern European countries) presented the CCCTB proposal, consisting of tangible fixed assets, sales by destination, number of employees and costs of employees (as a labour factor). Intangibles and financial assets were generally excluded from the FA methodology due to their mobile nature and the risk of circumvention of the system (Roggeman et al, 2012;Mintz, 2008). Considering the importance of intangible assets in global value chains, the European Commission indicated the inclusion of intangible assets in the formula 3 Weiner (2006) asserted that the preferred formula should not be solely based on performance superiority, but rather prioritize characteristics of simplicity, comprehensibility, feasibility and acceptability to individual states.…”

“…The FA explanatory power of the variability in profitability of companies significantly depends on the choice of factors implemented in the FA and their relative weights. The CCCTB FA was addressed by Hundsdoerfer and Wagner (2020), Krchnivá and Nerudová (2018), Nerudová and Krchnivá (2016) and Roggeman et al (2012). Said empirical studies investigated microeconomic data and based on a regression analysis estimated the percentage of explained variability in profitability.…”

Splitting of Corporate Taxes in Germany and Formulaic Distribution of a CCCTB – Critical Comparison

“…The consideration of demand in a formulaic profit distribution goes back to Musgrave (1972). Roggeman et al (2013) simulate the splitting results of different formular designs. Lessons from the Canadian example are presented by Mintz (2004, S. 222 f.).…”