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

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