Will Corporate Tax Consolidation Improve Efficiency in the EU?

Tinbergen Institute Discussion Paper No. 2007-076/2

36 Pages Posted: 25 Sep 2007

See all articles by Albert van der Horst

Albert van der Horst

CPB Netherlands Bureau of Economic Policy Analysis

Leon J.H. Bettendorf

Erasmus University Rotterdam (EUR)

Hugo Rojas-Romagosa

World Bank

Date Written: September 2007

Abstract

The European Commission favours the introduction of a consolidated corporate tax base to overcome the distortions arising from the existing system of separate accounting. The blueprints for consolidation are simulated with the applied general equilibrium model CORTAX. We show that the benefits of a common consolidated tax base are limited due to two weaknesses. Formula apportionment, which is needed to allocate the consolidated taxable profits across jurisdictions, creates for MNEs new tax planning possibilities to exploit tax rate differentials in the European Union. In addition, it triggers tax competition as the incentives for member states to attract foreign investment by reducing their tax rates are enforced. The second weakness arises from the unlevel playing field, which is introduced if only part of the firms chooses to participate in the consolidation. The gains from consolidation can be fully grasped if it is obliged for all firms and accompanied by harmonisation of the tax rate.

Keywords: corporate tax, consolidation, formula apportionment, European Union, applied general equilibrium model

JEL Classification: H87, H21, H25, F21

Suggested Citation

van der Horst, Albert and Bettendorf, Leon J.H. and Rojas-Romagosa, Hugo, Will Corporate Tax Consolidation Improve Efficiency in the EU? (September 2007). Tinbergen Institute Discussion Paper No. 2007-076/2, Available at SSRN: https://ssrn.com/abstract=1016948 or http://dx.doi.org/10.2139/ssrn.1016948

Albert Van der Horst (Contact Author)

CPB Netherlands Bureau of Economic Policy Analysis ( email )

2585 JR

Leon J.H. Bettendorf

Erasmus University Rotterdam (EUR) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31 10 4081808 (Phone)

Hugo Rojas-Romagosa

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States
20433 (Fax)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
282
Abstract Views
1,195
rank
119,610
PlumX Metrics