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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 ()
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Dirk Kiesewetter: University of Würzburg
Tobias Steigenberger: University of Würzburg
Matthias Stier: University of Würzburg

Journal of Business Economics, 2018, vol. 88, issue 9, 1029-1060

Abstract: Abstract The European Commission has been supporting a transition from a system of separate accounting to formula apportionment. After its 2011 draft directive was rejected by the Council, the Commission presented two new draft directives in October 2016, one stipulating rules for a common tax base and another the terms for consolidation and apportionment. The aspired system of unitary taxation is considered more resistant to profit shifting and assumed to reduce compliance costs. However, there are also doubts about the extent, to which such a system will eradicate tax-planning activities of MNEs. Other concerns have arisen about the practical issue of enforcing uniform rules for asset valuation throughout the member states. We use a dynamic model of tax accounting based on neoclassical investment theory and effective tax rates to determine to what extent formula apportionment mitigates the efficiency of typical profit-shifting strategies. We focus on the roles of transfer pricing and intragroup debt financing (through loans and leases) under both separate accounting and formula apportionment. We also take into account a possible leeway for inconsistent valuation. Our results show that instead of eliminating tax planning strategies, the proposed system might 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 for new forms of tax planning. It is therefore essential to give credit to these new kinds of tax incentives when implementing a system of unitary taxation.

Keywords: Effective tax rate; CCCTB; Formula apportionment; Tax planning; Profit shifting; Debt financing; Leasing (search for similar items in EconPapers)
JEL-codes: H20 F21 D21 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:spr:jbecon:v:88:y:2018:i:9:d:10.1007_s11573-018-0891-y