Cross-Border Loss Offset and Formulary Apportionment: How Do They Affect Multijurisdictional Firm Investment Spending and Interjurisdictional Tax Competition?

29 Pages Posted: 18 Aug 2003

See all articles by Marcel Gerard

Marcel Gerard

Facultes Universitaires Catholiques de Mons (FUCAM); CESifo (Center for Economic Studies and Ifo Institute)

Joann Martens Weiner

Facultes Universitaires Saint-Louis, Brussels

Date Written: August 2003

Abstract

Motivated by the EU Commission's suggested company tax reforms, this paper investigates how cross-border loss offset and formulary apportionment of a consolidated tax base affect the investment and transfer pricing behaviour of a multijurisdictional firm, and how they affect the behaviour of governments potentially engaged in tax competition. The paper shows that cross-border loss offset mitigates both the reactions of a multijurisdictional firm to tax changes and the amount of tax competition engaged in by governments. However, formulary apportionment (with a consolidated tax base) boosts the sensitivity of firms to tax changes and increases the scope for interjurisdictional tax competition as well. For governments, formulary apportionment operates like a risk-sharing or partial equalisation mechanism.

Keywords: Cross Border Loss Offset, Multinational Firms, Tax Competition

JEL Classification: H31, H73, H87

Suggested Citation

Gerard, Marcel and Martens Weiner, Joann, Cross-Border Loss Offset and Formulary Apportionment: How Do They Affect Multijurisdictional Firm Investment Spending and Interjurisdictional Tax Competition? (August 2003). CESifo Working Paper Series No. 1004. Available at SSRN: https://ssrn.com/abstract=434080

Marcel Gerard (Contact Author)

Facultes Universitaires Catholiques de Mons (FUCAM) ( email )

Chaussee de Binche, 151
Mons 7000
Belgium

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Joann Martens Weiner

Facultes Universitaires Saint-Louis, Brussels ( email )

Boulevard du Jardin Botanique 43
Bruxelles, 1000
Belgium

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