Working Paper: CEPR ID: DP2831
Authors: Soren Bo Nielsen; Pascalis Raimondos-Moller; Guttorm Schjelderup
Abstract: It is observed in the real world that taxes matter for location decisions and that multinationals shift profits by transfer pricing. The US and Canada use Formula Apportionment (FA) to tax corporate income, and the EU is debating a switch from Separate Accounting (SA) to FA. This paper develops a theoretical model that compares basic properties of FA to SA. The focal point of the analysis is on how changes in tax rates affect capital formation, input choice, and transfer pricing as well as spillovers on tax revenue in other countries. The analysis shows that a move from SA to FA will not eliminate such spillovers and will, in cases identified in the paper, actually aggravate them.
Keywords: Formula Apportionment; Separate Accounting; Tax Externalities; Transfer Prices
JEL Codes: F23; H23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increase in corporate tax rates in one country (H25) | decrease in capital stocks of multinational enterprises (MNEs) in both countries (F23) |
| increase in corporate tax rates in one country (H25) | increase in capital stocks of multinational enterprises (MNEs) in other country under formula apportionment (FA) (F23) |
| increase in corporate tax rates in one country (H25) | ambiguous cross-effect on tax revenue (H27) |
| spillover effects depend on costs associated with transfer pricing and profit levels generated by MNEs (F16) | tax revenue (H27) |