This paper explores the economic consequences of proposed EU reforms for a common consolidated corporate tax base. The reforms replace separate accounting with formula apportionment as a way to allocate corporate tax bases across countries. To assess the economic implications, we use a numerical computable general equilibrium (CGE) model for Europe. It encompasses several decision margins of firms such as marginal investment, FDI decisions, and multinational profit shifting. The simulations suggest that consolidation does not yield substantial welfare gains for Europe. The variation of effects across countries is large and depends on the choice of the apportionment formula. Consolidation with formula apportionment does not weaken incentives for tax competition. Tax competition instead offers a rationale for rate harmonization, in addition to base harmonization.
WP 09/32 Leon Bettendorf, Michael P. Devereux, Albert van der Horst, Simon Loretz & Ruud A. de Mooij, Corporate tax harmonization in the EU
Research Highlight 2010
Corporate tax harmonisation in the EU
This project explores more widely the economic consequences of proposed EU reforms for a Common Consolidated Corporate Tax Base. To take the analysis further, we use a numerical computable general equilibrium (CGE) model for the EU. This model encompasses several decisions of companies such as the scale of investment, location decisions, and profit shifting. Simulations using the model suggest that consolidation does not yield substantial welfare gains for Europe: there is considerable variation in the effects across countries. The effects of consolidation with formula apportionment, as in the CCCTB, depend on the choice of the apportionment formula. The CCCTB does not weaken incentives for tax competition.
