Can formula apportionment really prevent multinational enterprises from profit shifting? The role of asset valuation, intragroup debt, and leases

Dirk Kiesewetter, Tobias Steigenberger and Matthias Stier

No 175, arqus Discussion Papers in Quantitative Tax Research from arqus - Arbeitskreis Quantitative Steuerlehre

Abstract: The European Commission has been supporting a transition from a system of separate accounting to a system of formula apportionment. In 2011, it presented a proposal for a council directive on a Common Consolidated Corporate Tax Base (CCCTB). Formula apportionment is often considered more resistant to profit shifting and assumed to reduce compliance costs. We use a dynamic model of tax accounting based on neoclassical investment theory and effective tax rates to determine whether, and to what extent, formula apportionment mitigates the efficiency of typical profit-shifting measures. We focus on the roles of transfer pricing and intragroup debt financing (through loans and leases) under both separate accounting and formula apportionment. Our results show that instead of eliminating tax planning strategies, the proposed system will simply induce a shift from manipulating reported profits to influencing the apportionment key. Inside the European Union, the CCCTB may be able to render thin capitalisation rules and transfer pricing documentation redundant. However, formula apportionment invites new forms of tax planning involving manipulating the book value of assets rather than profit shifting.

Keywords: Effective Tax Rate; CCCTB; Formula Apportionment; Tax Planning; Profit Shifting; Debt Financing; Leasing (search for similar items in EconPapers)
JEL-codes: D21 F21 F23 H20 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-acc
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Journal Article: Can formula apportionment really prevent multinational enterprises from profit shifting? The role of asset valuation, intragroup debt, and leases (2018)
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