Formula Apportionment: Factor Allocation and Tax Avoidance

50 Pages Posted: 2 Aug 2017

See all articles by Sebastian Eichfelder

Sebastian Eichfelder

Otto-von-Guericke-Universität Magdeburg

Frank Hechtner

Friedrich-Alexander-Universität Erlangen-Nürnberg

Jochen Hundsdoerfer

Free University of Berlin (FUB); Norwegian Center for Taxation

Date Written: July 31, 2017


This paper addresses the question of how firms react to tax incentives in a formula apportionment (FA) tax regime. Under FA, the profits of all consolidated entities of a business group are summed and then allocated according to a formula based on FA factors. We hypothesize that firms may change the allocation of real production factors and/or manipulate the FA factor through tax avoidance strategies. Analysing FA tax effects of the German local business tax with payroll expense as the exclusive FA factor, we find empirical evidence consistent with both hypotheses. Regarding the allocation of production factors, we observe significant tax effects on labour input at the intensive margin but not on labour input at the extensive margin. In addition, we find evidence of an indirect FA spillover effect on capital investment. Our findings on tax avoidance proxies are consistent with tax-induced manipulations of payroll expense as an FA factor to save tax payments.

Keywords: Factor Allocation, Formula Apportionment, Profit Shifting, Tax Avoidance

JEL Classification: H32, H71, H73, J61

Suggested Citation

Eichfelder, Sebastian and Hechtner, Frank and Hundsdoerfer, Jochen, Formula Apportionment: Factor Allocation and Tax Avoidance (July 31, 2017). European Accounting Review Forthcoming, Available at SSRN:

Sebastian Eichfelder

Otto-von-Guericke-Universität Magdeburg ( email )

Universitätspl. 2
PSF 4120
Magdeburg, D-39106
0391-67-18811 (Phone)

Frank Hechtner (Contact Author)

Friedrich-Alexander-Universität Erlangen-Nürnberg ( email )

Lange Gasse 20
Nürnberg, 90403

Jochen Hundsdoerfer

Free University of Berlin (FUB) ( email )

Norwegian Center for Taxation ( email )

Helleveien 30
Bergen, Bergen 5045

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