CCCTB – The Employment Factor Game

Abstract

The draft for a CCCTB Directive in the EU includes the suggestion for an apportionment formula which allocates taxable profits to group member corporations and to the respective Member States. The draft directive delegates the right to define one apportionment factor, the term ‘Employee’ to the Member States, which can choose a narrow or a broad definition, the latter including also atypical employment schemes. Using a game-theoretic approach we show that defining ‘Employee’ broadly so as to maximize the Member State’s share in the apportionment factor is only optimal when tax rate differences and different sizes of atypical employment schemes are disregarded. If such differentials and the multinational corporation’s reactions to different domestic definitions are included a narrow definition of ‘Employee’ yields the highest individual pay-offs to the countries involved. Our paper differs from previous research on the economic effects of the CCCTB apportionment formula as it is the first analysing the employment factor and its distortive effects. We discuss possible tax minimizing strategies for multinationals by shifting employment and develop a model to quantify these potential relocations. The results of our paper may be relevant for the European Commission and the Council, when debating the details of formula apportionment. Furthermore we show how Member States could use the ‘Employee’ definition to both minimize factor emigration and maximize factor immigration, if the factor definitions remain unchanged.

Keywords: CCCTB, Game Theory, Formulary Apportionment, Group Taxation, Corporate Income Tax, Dependent Self-Employed

JEL Classification: H21, H23, H25, K34