Tax Spillovers Under Separate Accounting and Formula Apportionment

Nielsen, Soren Bo; Raimondos, Pascalis; Schjelderup, Guttorm

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Tax Spillovers Under Separate Accounting and Formula Apportionment

34 Pages Posted: 15 Jul 2001

See all articles by Soren Bo Nielsen

Soren Bo Nielsen

Copenhagen Business School - Department of Economics; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Queensland University of Technology - School of Economics and Finance; Copenhagen Business School - Department of Economics; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Guttorm Schjelderup

NHH Norwegian School of Economics - Department of Business and Management Science

Date Written: June 2001

Abstract

It is observed in the real world that taxes matter for location decisions and that multinationals shift profits by transfer pricing. The US and Canada use Formula Apportionment (FA) to tax corporate income, and the EU is debating a switch from Separate Accounting (SA) to FA. This paper develops a theoretical model that compares basic properties of FA to SA. The focal point of the analysis is on how changes in tax rates affect capital formation, input choice, and transfer pricing as well as spillovers on tax revenue in other countries. The analysis shows that a move from SA to FA will not eliminate such spillovers and will, in cases identified in the paper, actually aggravate them.

Keywords: Transfer prices, separate accounting, formula apportionment, tax externalities

JEL Classification: F23, H23

Suggested Citation: Suggested Citation

Nielsen, Soren Bo and Raimondos, Pascalis and Schjelderup, Guttorm, Tax Spillovers Under Separate Accounting and Formula Apportionment (June 2001). Available at SSRN: https://ssrn.com/abstract=276415