Tax Spillovers Under Separate Accounting and Formula Apportionment
34 Pages Posted: 15 Jul 2001
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
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