Proposals for a European Corporate Taxation and their Influence on Multinationals' Tax Planning

Arqus Quantitative Tax Research Discussion Paper No. 54

43 Pages Posted: 12 Aug 2012

See all articles by Caren Sureth-Sloane

Caren Sureth-Sloane

Paderborn University; Vienna University of Economics and Business; TRR 266 Accounting for Transparency

Michaela Bäumer

University of Paderborn

Date Written: September 1, 2008

Abstract

In this paper we analyze reform concepts aiming to harmonize group taxation throughout the EU. The Common Consolidated Corporate Tax Base (CCCTB) enables European multinationals to determine their tax burden using a common tax base. By contrast, the European Tax Allocation System (ETAS) is based on the tax systems across the EU. We analyze both concepts’ impact on the required minimum rate of return on marginal investment using a dynamic capital budgeting model. Performing various scenarios, we investigate whether the implementation of ETAS or CCCTB fosters or discriminates real investments. We find that tax planning is still possible under both concepts. However, with respect to retention policy, tax planning under ETAS is less feasible than under CCCTB. Under ETAS, investment decisions are more sensitive towards tax rate differentials in the EU. However, a mechanism is implemented in ETAS to prevent a “race to the bottom” of tax rates and to prohibit the relocation of active operations (EU tax credit carry forward). The CCCTB concept does not have such a mechanism. Consequently, ETAS can prevent tax planning by relocating the holding’s domicile from a high-tax to a low-tax country. We highlight the sensitivities, advantages, and drawbacks of both concepts that should be considered when developing a European corporate tax reform and refining the idea of CCCTB.

Keywords: European Company Taxation, European Tax Allocation System, Common Consolidated Corporate Tax Base, Choice of International Location, Investment Decisions, Tax Planning

JEL Classification: H21, H25

Suggested Citation

Sureth-Sloane, Caren and Bäumer, Michaela, Proposals for a European Corporate Taxation and their Influence on Multinationals' Tax Planning (September 1, 2008). Arqus Quantitative Tax Research Discussion Paper No. 54, Available at SSRN: https://ssrn.com/abstract=2128094 or http://dx.doi.org/10.2139/ssrn.2128094

Caren Sureth-Sloane (Contact Author)

Paderborn University ( email )

Warburger Str. 100
Paderborn, 33098
Germany

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

TRR 266 Accounting for Transparency ( email )

Warburger Straße 100
Paderborn, 33098
Germany

Michaela Bäumer

University of Paderborn ( email )

Warburger Str. 100
Paderborn, D-33098
Germany

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