Tax Revenue Losses Through Cross-Border Loss Offset: An Insurmountable Hurdle for Formula Apportionment?

45 Pages Posted: 27 Mar 2017

See all articles by Mohammed Mardan

Mohammed Mardan

Norwegian School of Economics (NHH) - Department of Business and Management Science; Norwegian Center for Taxation; CESifo (Center for Economic Studies and Ifo Institute)

Michael Stimmelmayr

ETH Zürich - Department of Management, Technology, and Economics (D-MTEC); CESifo (Center for Economic Studies and Ifo Institute)

Date Written: March 01, 2017

Abstract

This paper analyzes the relevance of firm losses for tax revenues and welfare when switching from separate accounting to a system of tax base consolidation with formula apportionment. We find that a system change unambiguously decreases tax revenues in the short run, in which neither firms nor governments can adjust their behavior, due to the cross-border loss offset inherent to formula apportionment. In the medium run, in which only firms can adjust their strategies, tax revenues are still lower under formula apportionment if the probability of incurring losses or the costs of profit shifting are sufficiently small. However, in the long run, where both firms and governments are able to adjust their behavior after the system change, a switch from separate accounting to formula apportionment is beneficial under the aforementioned conditions. Furthermore, we show that a higher weight of input shares in the apportionment formula may mitigate tax competition because, contrary to output factors, input factors provide an insurance against tax revenue shortfalls due to loss-making affiliates.

Keywords: separate accounting, formula apportionment, corporate losses, cross-border loss offset, CCCTB

JEL Classification: H730, H250, F230

Suggested Citation

Mardan, Mohammed and Stimmelmayr, Michael, Tax Revenue Losses Through Cross-Border Loss Offset: An Insurmountable Hurdle for Formula Apportionment? (March 01, 2017). CESifo Working Paper Series No. 6368, Available at SSRN: https://ssrn.com/abstract=2941367

Mohammed Mardan

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway

HOME PAGE: http://sites.google.com/site/webpagemohammedmardan/

Norwegian Center for Taxation ( email )

Helleveien 30
Bergen, Bergen 5045
Norway

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Michael Stimmelmayr (Contact Author)

ETH Zürich - Department of Management, Technology, and Economics (D-MTEC) ( email )

ETH-Zentrum
Zurich, CH-8092
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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