Will corporate tax consolidation improve efficiency in the EU?

Albert Van der Horst (), Leon Bettendorf () and Hugo Rojas-Romagosa ()

CPB Document from CPB Netherlands Bureau for Economic Policy Analysis

Abstract:

Consolidation of the tax base in the European Union is expected to curve compliance costs and reduce profit shifting. A number of proposals for consolidation from the European Commission are simulated with the applied general equilibrium model CORTAX.

We show that the benefits from consolidation are offset by two weaknesses in the proposals for a common consolidated tax base. Formula apportionment, which is needed to allocate the consolidated taxable profits across jurisdictions, creates new tax planning possibilities for MNEs and allows them to benefit from existing tax rate differentials in the European Union. In addition, it triggers tax competition as member states may attract foreign investment by reducing their tax rates. The second distortion is an unlevel playing field, which is introduced if only part of the firms participate in the consolidation. The gains from consolidation can be fully grasped if it is obliged for all firms and if it is accompanied by a harmonisation of the tax rate.

JEL-codes: H87 H21 H25 F21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec, nep-pbe and nep-pub
Date: 2007-03
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Persistent link: http://EconPapers.repec.org/RePEc:cpb:docmnt:141

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