Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/86495
Authors: 
van der Horst, Albert
Bettendorf, Leon
Rojas-Romagosa, Hugo
Year of Publication: 
2007
Series/Report no.: 
Tinbergen Institute Discussion Paper 07-076/2
Abstract: 
The European Commission favours the introduction of a consolidated corporate tax base to overcome the distortions arising from the existing system of separate accounting. The blueprints for consolidation are simulated with the applied general equilibrium model CORTAX. We show that the benefits of a common consolidated tax base are limited due to two weaknesses. Formula apportionment, which is needed to allocate the consolidated taxable profits across jurisdictions, creates for MNEs new tax planning possibilities to exploit tax rate differentials in the European Union. In addition, it triggers tax competition as the incentives for member states to attract foreign investment by reducing their tax rates are enforced. The second weakness arises from the unlevel playing field, which is introduced if only part of the firms chooses to participate in the consolidation. The gains from consolidation can be fully grasped if it is obliged for all firms and accompanied by harmonisation of the tax rate.
Subjects: 
corporate tax
consolidation
formula apportionment
European Union
applied general equilibrium model
JEL: 
H87
H21
H25
F21
Document Type: 
Working Paper

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