How Would Formula Apportionment in the EU Affect the Distribution and The Size of the Corporate Tax Base? An Analysis Based on German Multinationals

30 Pages Posted: 23 May 2006

See all articles by Clemens Fuest

Clemens Fuest

ifo Institute – Leibniz Institute for Economic Research at the University of Munich; Ludwig-Maximilians-University, Munich; Center for Economic Studies (CES)

Thomas Hemmelgarn

European Commission

Fred Ramb

Deutsche Bundesbank, Economics Department, Monetary Policy and Monetary Analysis

Date Written: May 2006

Abstract

This paper analyses the effects of introducing a common EU tax base with formula apportionment on the size of the EU wide tax base and on the distribution of the tax base between the EU member countries. We use a combined dataset of Deutsche Bundesbank's Foreign Direct Investment data (MiDi) and corporate balance sheet data (Ustan and Hoppenstedt) for the tax base estimations. The data is used to construct i) a separate accounting and ii) a formula apportionment tax base for the firms in the sample. Our results suggest that due to border crossing loss-offset, the EU wide corporate tax base represented by our data sample shrinks significantly. Smaller countries which are usually considered to attract book profits under the current system, i.e. Ireland and the Netherlands, tend to lose a larger part of their tax base than larger countries like Germany, Italy, France or Great Britain. However, these results should be evaluated in the light of the limitations of the data used in this study since our analysis is based on German FDI data only. Furthermore, the calculations do not take into account behavioural responses of companies caused by such a system change.

Keywords: EU Tax Base, Formula Apportionment, Multinational Companies

JEL Classification: F23, H25

Suggested Citation

Fuest, Clemens and Hemmelgarn, Thomas and Ramb, Fred, How Would Formula Apportionment in the EU Affect the Distribution and The Size of the Corporate Tax Base? An Analysis Based on German Multinationals (May 2006). Available at SSRN: https://ssrn.com/abstract=854909 or http://dx.doi.org/10.2139/ssrn.854909

Clemens Fuest

ifo Institute – Leibniz Institute for Economic Research at the University of Munich

Poschinger Str. 5
Munich, DE 81679
Germany
++89-9224-1430 (Phone)

Ludwig-Maximilians-University, Munich ( email )

Schackstrasse 4 / II
Munich, DE 80539
Germany

Center for Economic Studies (CES) ( email )

Schackstr. 4
Munich, DE 80539
Germany
++89 2180-2748 (Phone)
++89 2180-17845 (Fax)

Thomas Hemmelgarn (Contact Author)

European Commission ( email )

J-79 05/230
Brussels, Brussels B-1049
Belgium

HOME PAGE: http://https://ec.europa.eu/taxation_customs/business/economic-analysis-taxation_en

Fred Ramb

Deutsche Bundesbank, Economics Department, Monetary Policy and Monetary Analysis ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany
++49-69-9566-2809 (Phone)

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