Strategic Consolidation Under Formula Apportionment

35 Pages Posted: 8 Dec 2008

See all articles by Thiess Buettner

Thiess Buettner

University of Erlangen-Nuremberg-Friedrich Alexander Universität Erlangen Nürnberg; CESifo (Center for Economic Studies and Ifo Institute)

Nadine Riedel

Oxford University CBT; University of Hohenheim

Marco Runkel

University of Munich - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: December 2008

Abstract

This paper argues that profit-shifting activities of multi-jurisdictional enterprises (MJE) are maintained under a tax system of consolidation and formula apportionment (FA). A theoretical model discusses how an MJE can exploit its impact on the definition of the consolidated group strategically. The analysis shows that the MJE will run individual affiliates as separate un-consolidated firms for tax purposes if intra-group tax-rate differences, and thereby potential gains from profit-shifting, are large. We test this prediction using confidential firm-level tax-return data for the local business tax in Germany. The identification strategy exploits a quasi experiment derived from a major company tax reform in 2001 that reduced the costs associated with separating out individual affiliates. Our results show that, evaluated at the sample mean, an increase in the tax-rate variance among the MJE's affiliates by one standard deviation reduces the number of consolidated affiliates by 20%.

Keywords: corporate taxation, formula apportionment, micro data

JEL Classification: H32, H73

Suggested Citation

Buettner, Thiess and Riedel, Nadine and Runkel, Marco, Strategic Consolidation Under Formula Apportionment (December 2008). CESifo Working Paper Series No. 2484, Available at SSRN: https://ssrn.com/abstract=1313028 or http://dx.doi.org/10.2139/ssrn.1313028

Thiess Buettner (Contact Author)

University of Erlangen-Nuremberg-Friedrich Alexander Universität Erlangen Nürnberg ( email )

Lange Gasse 20
Nürnberg, Bavaria 90403
Germany

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Nadine Riedel

Oxford University CBT ( email )

Park End Street
Oxford, Oxfordshire OX1 1HP
United Kingdom

University of Hohenheim ( email )

Stuttgart
Germany

Marco Runkel

University of Munich - Department of Economics ( email )

Schackstr. 4
Munich, 80539
Germany
++49 (0) 89 2180 6339 (Phone)
++49 (0) 89 2180 3128 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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