German Abstract: Die (Wieder-)Einfuhrung einer Vermogensteuer ist in den vergangenen Jahren erneut in den Fokus der politischen Diskussion geruckt. Der vorliegende Beitrag vermittelt einen Eindruck von den Belastungswirkungen, die aus der Umsetzung von aktuell vorliegenden Besteuerungskonzepten resultieren wurden. Auf der Basis von realen Jahresabschlussdaten wird eine mehrperiodige Veranlagungssimulation durchgefuhrt, die insbesondere ermoglicht, den zu erwartenden Eigenkapitalverzehr sowie den Anstieg der Steuerbelastung fur die betrachtete Unternehmensgruppe zu quantifizieren. Von besonderem Interesse sind hierbei Unternehmen deren laufende Ertrage nicht ausreichen, um die Belastungen durch die Vermogensteuer zu tragen und damit einem Substanzverzehr ausgesetzt sind. Es zeigt sich, dass etwa die Halfte der Unternehmen im Untersuchungszeitraum von sechs Jahren in mindestens einem Jahr einen Substanzverzehr erfahrt. Der Vermogensteuer kommt somit keinesfalls der vielfach postulierte Charakter einer eher masig belastenden und im Wesentlichen substanzverschonenden Steuer zu. Zusatzbelastungen von knapp 100 bis zu 300% der Ertragsteuerlast sind keine Seltenheit und veranschaulichen das Gefahrdungspotenzial dieser Steuer fur den Wirtschaftsstandort Deutschland.English Abstract: The (re-)introduction of a wealth tax has become a focal point of interest as a result of last years’ political discussions. We analyze the impact of implementing currently discussed wealth tax concepts on the overall tax burden and companies’ equity. Simulating a tax assessment based on real annual financial statement data from German listed firms in a multi-period setting, we quantify the expected equity erosion as well as the increase in tax burden of these companies that is induced by wealth taxation at the corporate and shareholder level. Special attention is given to companies whose current yield is very low and thus have to take additional loans or liquidate assets to settle their wealth tax bill. Our findings indicate that about half of the companies suffer at least in one year from wealth tax-induced asset erosion within the six-year period under review. In contrast to the usually postulated moderate effects of a wealth tax on firms, our results indicate that the additional burden arising from wealth taxation can range from nearly 100% to 300% of the profit tax burden, highlighting the magnitude of the risk from wealth taxation for Germany as a location for business.
德国抽象:在过去几年中，对财富征税再次成为政策讨论的焦点。这篇文章解释了实施现行征税概念所导致的张力影响。根据真实的年度数据，采取了一套多周期性对外操作模拟，包括对前所未有的资本耗尽、以及所管理公司的司法辖区升高进行量化。尤其是，那些正在发生的公司，如果负担不起持续的财富税，有可能导致物质吃掉，其利益就会大增。结果表明，一半的企业在六年内，至少要吃一年时间。因此，对财富征税往往没有基本意义上驶入一个较穷、实质上是有形的税负的特性。收入税收负担增加不到100至300%，这绝非孤例，并且表明了该税对德国经济区区有威胁的潜力。三年财富的积累变成了去年的政治告录宏观经济的影响模拟一种建立在多树荫下的真实年计算数据，我们在各种背景下对照这一指数在企业和股票计价阶段计算的功用特别勋章意味着能成功的各种差别我的最佳人选是《对离家出走》的著名病人在contrast to the usually postulated温和花巧of a财富税on firms, our saber indicate通往additional疾病负担arising从财富taxation模型可以从nearly 100%到《300%利润大税负担,highlighting the magnitude of the风险从财富taxation for德国运营的地方商业.
{"title":"Vermögensteuer und ihre Implikationen für den Wirtschaftsstandort Deutschland - eine betriebswirtschaftliche Analyse (Wealth Tax and its Implications for Germany as a Location for Business - An Economic Analysis)","authors":"T. Hoppe, R. Maiterth, Caren Sureth-Sloane","doi":"10.2139/SSRN.2548398","DOIUrl":"https://doi.org/10.2139/SSRN.2548398","url":null,"abstract":"German Abstract: Die (Wieder-)Einfuhrung einer Vermogensteuer ist in den vergangenen Jahren erneut in den Fokus der politischen Diskussion geruckt. Der vorliegende Beitrag vermittelt einen Eindruck von den Belastungswirkungen, die aus der Umsetzung von aktuell vorliegenden Besteuerungskonzepten resultieren wurden. Auf der Basis von realen Jahresabschlussdaten wird eine mehrperiodige Veranlagungssimulation durchgefuhrt, die insbesondere ermoglicht, den zu erwartenden Eigenkapitalverzehr sowie den Anstieg der Steuerbelastung fur die betrachtete Unternehmensgruppe zu quantifizieren. Von besonderem Interesse sind hierbei Unternehmen deren laufende Ertrage nicht ausreichen, um die Belastungen durch die Vermogensteuer zu tragen und damit einem Substanzverzehr ausgesetzt sind. Es zeigt sich, dass etwa die Halfte der Unternehmen im Untersuchungszeitraum von sechs Jahren in mindestens einem Jahr einen Substanzverzehr erfahrt. Der Vermogensteuer kommt somit keinesfalls der vielfach postulierte Charakter einer eher masig belastenden und im Wesentlichen substanzverschonenden Steuer zu. Zusatzbelastungen von knapp 100 bis zu 300% der Ertragsteuerlast sind keine Seltenheit und veranschaulichen das Gefahrdungspotenzial dieser Steuer fur den Wirtschaftsstandort Deutschland.English Abstract: The (re-)introduction of a wealth tax has become a focal point of interest as a result of last years’ political discussions. We analyze the impact of implementing currently discussed wealth tax concepts on the overall tax burden and companies’ equity. Simulating a tax assessment based on real annual financial statement data from German listed firms in a multi-period setting, we quantify the expected equity erosion as well as the increase in tax burden of these companies that is induced by wealth taxation at the corporate and shareholder level. Special attention is given to companies whose current yield is very low and thus have to take additional loans or liquidate assets to settle their wealth tax bill. Our findings indicate that about half of the companies suffer at least in one year from wealth tax-induced asset erosion within the six-year period under review. In contrast to the usually postulated moderate effects of a wealth tax on firms, our results indicate that the additional burden arising from wealth taxation can range from nearly 100% to 300% of the profit tax burden, highlighting the magnitude of the risk from wealth taxation for Germany as a location for business.","PeriodicalId":385233,"journal":{"name":"FEN: Differences in Taxation & Corporate Finance (Topic)","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2015-10-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114634303","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The dialogue regarding the international taxation of multinational firms should move beyond the rhetoric of comparing supposedly territorial and worldwide systems of taxation. Among major countries, there are no pure territorial or pure worldwide systems, just systems that lie on a spectrum between these extremes. Once one recognizes the characteristics that determine where on the spectrum particular countries lie, it is far from clear that purportedly worldwide countries are further to the “pure worldwide” end of the spectrum than are many purportedly territorial countries. Still, along the spectrum, tradeoffs between “competitiveness” and efficient capital allocation (with attendant effects on the home country tax base) are inevitable. Thus, I describe international tax system design proposals that might transcend this tradeoff, examining several such options. Finally, I discuss the current efforts of the BEPS process.
{"title":"Beyond Territorial and Worldwide Systems of International Taxation","authors":"K. Clausing","doi":"10.2139/ssrn.2567952","DOIUrl":"https://doi.org/10.2139/ssrn.2567952","url":null,"abstract":"The dialogue regarding the international taxation of multinational firms should move beyond the rhetoric of comparing supposedly territorial and worldwide systems of taxation. Among major countries, there are no pure territorial or pure worldwide systems, just systems that lie on a spectrum between these extremes. Once one recognizes the characteristics that determine where on the spectrum particular countries lie, it is far from clear that purportedly worldwide countries are further to the “pure worldwide” end of the spectrum than are many purportedly territorial countries. Still, along the spectrum, tradeoffs between “competitiveness” and efficient capital allocation (with attendant effects on the home country tax base) are inevitable. Thus, I describe international tax system design proposals that might transcend this tradeoff, examining several such options. Finally, I discuss the current efforts of the BEPS process.","PeriodicalId":385233,"journal":{"name":"FEN: Differences in Taxation & Corporate Finance (Topic)","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2015-02-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130135749","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper analyzes the desirability of relaxing constraints on non-pro-rata share issuances and examines amendments to Australian listing rules that have done so. The Australian Stock Exchange (ASX) recently amended its listing rules to allow small-cap companies to issue up to 25% of their share capital at a discount of up to 25% (up from 15% issue at a 15% discount), if the company satisfies certain requirements (including approval of a supermajority of shareholders). The new changes have the potential to distort the shareholder-register. Further, if the equity issue is made to an existing blockholder (or blockholders), the super-majority requirement for the issue to take-place may only require a minority of non-blockholder-shareholders to agree. However, existing directors’ duties and shareholder remedies should be sufficient to protect shareholders from abuse of the new rules. Thus, they could provide additional flexibility to firms who may require significant capital-injections in order to undertake major investments or raise capital to stave-off financial distress.
{"title":"Should Exchanges Allow Larger and More Discounted Placements? An Analysis of Changes to ASX Listing Rules","authors":"M. Humphery‐Jenner, Jo‐Ann Suchard","doi":"10.2139/SSRN.2443201","DOIUrl":"https://doi.org/10.2139/SSRN.2443201","url":null,"abstract":"This paper analyzes the desirability of relaxing constraints on non-pro-rata share issuances and examines amendments to Australian listing rules that have done so. The Australian Stock Exchange (ASX) recently amended its listing rules to allow small-cap companies to issue up to 25% of their share capital at a discount of up to 25% (up from 15% issue at a 15% discount), if the company satisfies certain requirements (including approval of a supermajority of shareholders). The new changes have the potential to distort the shareholder-register. Further, if the equity issue is made to an existing blockholder (or blockholders), the super-majority requirement for the issue to take-place may only require a minority of non-blockholder-shareholders to agree. However, existing directors’ duties and shareholder remedies should be sufficient to protect shareholders from abuse of the new rules. Thus, they could provide additional flexibility to firms who may require significant capital-injections in order to undertake major investments or raise capital to stave-off financial distress.","PeriodicalId":385233,"journal":{"name":"FEN: Differences in Taxation & Corporate Finance (Topic)","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2014-10-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133445381","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
During 2013 the concept of "trapped cash" garnered heightened attention as reports of Dell, Apple and other firms holding massive cash levels outside the US surfaced. So called "trapped cash" refers to cash and liquid investments held by subsidiaries located outside the United States. Firms with overseas subsidiaries located in jurisdictions where the tax rate is lower than the rates in the US can reduce taxes by attributing profits to foreign locales. But bringing the cash back to the US subjects the funds to the US corporate tax rate, less credit for foreign income taxes paid. The House Ways and Means Committee held hearings in June 2013 to examine corporate profit shifting by multinationals. This followed hearings held by The Senate Permanent Subcommittee on Investigations in May 2013 which focused on tax strategies at Apple and earlier hearings in September 2012 which focused on Microsoft and Hewlett Packard. Some have accused global firms of acting to avoid taxes leading to perhaps several billions of dollars of lost tax revenues. Others note that the real culprit is a US tax code with the highest corporate tax rates in the developed world. As the debate has raged, the Internal Revenue Service has sought to prohibit strategies related to intangible assets that the IRS claims firms have exploited to repatriate profits without tax implications. While the topic impacts all firms with liquid investments held outside of the US, this issue has been particularly important recently in the technology sector since over the past few years tech firms have amassed high cash levels from overseas operations as earnings strengthened and shrinking growth rates provided fewer investment opportunities.Here we use the technology sector as a case study to: examine the magnitude of the issue, consider firm options for "trapped" cash and assess the valuation investors should place on trapped cash.
2013年，随着戴尔(Dell)、苹果(Apple)等公司在美国境外持有大量现金的报道浮出水面，“现金陷阱”的概念引起了人们的高度关注。所谓的“困现金”是指美国境外子公司持有的现金和流动投资。在税率低于美国的司法管辖区设有海外子公司的公司，可以通过将利润转移到外国地区来减少税收。但将现金带回美国需要缴纳美国企业税率，减少对已缴纳外国所得税的抵免。众议院筹款委员会(House Ways and Means Committee)于2013年6月举行听证会，审查跨国公司的利润转移。此前，参议院常设调查小组委员会于2013年5月举行了听证会，重点关注苹果的税收策略，2012年9月举行了听证会，重点关注微软和惠普。一些人指责跨国公司的避税行为可能导致数十亿美元的税收损失。其他人指出，真正的罪魁祸首是美国的税法，它的企业税率是发达国家中最高的。随着争论愈演愈烈，美国国税局(Internal Revenue Service)试图禁止与无形资产相关的策略。国税局声称，企业利用无形资产将利润汇回国内，而不涉及税收。虽然这个话题影响到所有在美国境外持有流动性投资的公司，但这个问题最近在科技行业尤为重要，因为在过去几年里，随着盈利增强和增长率下降提供的投资机会减少，科技公司从海外业务中积累了大量现金。在这里，我们以科技行业为例研究:检查问题的严重性，考虑“被困”现金的公司选择，并评估投资者应该对被困现金的估值。
{"title":"When is a Dollar Not Worth a Dollar? The 'Trapped' Cash Controversy","authors":"Russell P. Engel, Bridget M. Lyons","doi":"10.2139/SSRN.2362078","DOIUrl":"https://doi.org/10.2139/SSRN.2362078","url":null,"abstract":"During 2013 the concept of \"trapped cash\" garnered heightened attention as reports of Dell, Apple and other firms holding massive cash levels outside the US surfaced. So called \"trapped cash\" refers to cash and liquid investments held by subsidiaries located outside the United States. Firms with overseas subsidiaries located in jurisdictions where the tax rate is lower than the rates in the US can reduce taxes by attributing profits to foreign locales. But bringing the cash back to the US subjects the funds to the US corporate tax rate, less credit for foreign income taxes paid. The House Ways and Means Committee held hearings in June 2013 to examine corporate profit shifting by multinationals. This followed hearings held by The Senate Permanent Subcommittee on Investigations in May 2013 which focused on tax strategies at Apple and earlier hearings in September 2012 which focused on Microsoft and Hewlett Packard. Some have accused global firms of acting to avoid taxes leading to perhaps several billions of dollars of lost tax revenues. Others note that the real culprit is a US tax code with the highest corporate tax rates in the developed world. As the debate has raged, the Internal Revenue Service has sought to prohibit strategies related to intangible assets that the IRS claims firms have exploited to repatriate profits without tax implications. While the topic impacts all firms with liquid investments held outside of the US, this issue has been particularly important recently in the technology sector since over the past few years tech firms have amassed high cash levels from overseas operations as earnings strengthened and shrinking growth rates provided fewer investment opportunities.Here we use the technology sector as a case study to: examine the magnitude of the issue, consider firm options for \"trapped\" cash and assess the valuation investors should place on trapped cash.","PeriodicalId":385233,"journal":{"name":"FEN: Differences in Taxation & Corporate Finance (Topic)","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2013-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130320028","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The literature on business responses to state taxes traditionally holds businesses respond to tax differences through plant relocation and expansion planning. This literature is silent on the tradeoffs that businesses would make to a state’s tax policy, if they could adjust the taxes to suit their own preferences and legal status. This research addresses the question of what tradeoffs businesses would make in tax policy by utilizing the budgetary tradeoff methodology developed in the political science and political economy literature. As predicted by theory, firms responded to a survey by the Kansas Department of Commerce that they would minimize the taxes that they have to pay but differences exist among different types of businesses, particularly out of state businesses. Kansas is an interesting case given the state’s first-of-its-kind removal of taxes on pass through corporations. This case shows that the tax tradeoff theory is useful for analyzing the characteristics of firms’ tradeoff choices.
{"title":"The Relationship between Legal Status, Location, and Business Tax Preference: The Case of Kansas","authors":"Zachary Mohr","doi":"10.2139/ssrn.2805207","DOIUrl":"https://doi.org/10.2139/ssrn.2805207","url":null,"abstract":"The literature on business responses to state taxes traditionally holds businesses respond to tax differences through plant relocation and expansion planning. This literature is silent on the tradeoffs that businesses would make to a state’s tax policy, if they could adjust the taxes to suit their own preferences and legal status. This research addresses the question of what tradeoffs businesses would make in tax policy by utilizing the budgetary tradeoff methodology developed in the political science and political economy literature. As predicted by theory, firms responded to a survey by the Kansas Department of Commerce that they would minimize the taxes that they have to pay but differences exist among different types of businesses, particularly out of state businesses. Kansas is an interesting case given the state’s first-of-its-kind removal of taxes on pass through corporations. This case shows that the tax tradeoff theory is useful for analyzing the characteristics of firms’ tradeoff choices.","PeriodicalId":385233,"journal":{"name":"FEN: Differences in Taxation & Corporate Finance (Topic)","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2012-09-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121717218","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper analyzes tax competition when welfare maximizing jurisdictions levy source-based corporate taxes and multinational enterprises choose tax-efficient capital-to-debt ratios. Under separate accounting, multinationals shift debt from low-tax to high-tax countries. The Nash equilibrium of the tax competition game is characterized by underprovision of publicly provided goods. Under formula apportionment, the country-specific capital-to-debt ratio of a multinational’s affiliate is independent of the jurisdiction’s tax rate. Public good provision is either too large or too small. If the debt externality is not negative, there is clearly underprovision under formula apportionment.
{"title":"Multinational Capital Structure and Tax Competition","authors":"M. Wrede","doi":"10.2139/ssrn.1601188","DOIUrl":"https://doi.org/10.2139/ssrn.1601188","url":null,"abstract":"This paper analyzes tax competition when welfare maximizing jurisdictions levy source-based corporate taxes and multinational enterprises choose tax-efficient capital-to-debt ratios. Under separate accounting, multinationals shift debt from low-tax to high-tax countries. The Nash equilibrium of the tax competition game is characterized by underprovision of publicly provided goods. Under formula apportionment, the country-specific capital-to-debt ratio of a multinational’s affiliate is independent of the jurisdiction’s tax rate. Public good provision is either too large or too small. If the debt externality is not negative, there is clearly underprovision under formula apportionment.","PeriodicalId":385233,"journal":{"name":"FEN: Differences in Taxation & Corporate Finance (Topic)","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2010-04-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127647634","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Debt and equity are treated differently for many purposes in federal tax law. The most important difference is that payments made on debt may be deducted in computing a corporation's taxable income, while payments made on equity may not. Although this distinction is well-settled, it has little theoretical basis and is not clearly drawn in the tax law. As a result, there has for a long time been confusion over how to classify, for tax purposes, instruments that do not closely resemble "ordinary" debt or "ordinary" equity.
{"title":"Hybrid Instruments and the Debt-Equity Distinction in Corporate Taxation","authors":"A. Emmerich","doi":"10.2307/1599573","DOIUrl":"https://doi.org/10.2307/1599573","url":null,"abstract":"Debt and equity are treated differently for many purposes in federal tax law. The most important difference is that payments made on debt may be deducted in computing a corporation's taxable income, while payments made on equity may not. Although this distinction is well-settled, it has little theoretical basis and is not clearly drawn in the tax law. As a result, there has for a long time been confusion over how to classify, for tax purposes, instruments that do not closely resemble \"ordinary\" debt or \"ordinary\" equity.","PeriodicalId":385233,"journal":{"name":"FEN: Differences in Taxation & Corporate Finance (Topic)","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"1985-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114612571","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We examine which tax allocation system leads to more severe distortions with respect to locational investment decisions. We consider separate accounting (SA) and formula apportionment (FA). The effects of both systems have been hotly debated in Europe in the past years. The reason is that the EU Member States are striving to implement a common European tax system that would lead to a switch from SA to FA. While existing studies focus primarily on the impact of taxes on locational decisions under either SA or FA, the main innovation of this paper is that it compares both systems with regard to the level of distortions they induce. We compare the optimal pre-tax investment decision with the optimal after-tax investment decision and infer from the difference in the allocation of investment funds which tax allocation system causes more severe distortions. We assume that the multinational group (MNG) has comprehensive book income shifting opportunities under SA. We find that the investment incentives under SA are opposed to those under FA for a profitable investment project. Whereas under SA as much as possible should be invested in a high-tax country, under FA as much as possible should be invested in a low-tax country. The distortions of locational investment decisions tend to be more severe under SA than under FA if a greater share of investment funds is to be invested in a low-tax country from a pre-tax perspective and the investment is profitable. Vice versa, locational decisions may be more distorted under FA if the optimal pre-tax investment decision requires investing a major share of funds in the high-tax country. In contrast to the often stated insensitivity of FA towards income shifting, we find the introduction of a tax allocation system based on FA in Europe could lead to a severe shift of economic substance to low-tax countries. The results of this paper are of particular interest for European policy makers and MNGs as our findings may induce European MNGs to reassess their recent locational investment decisions in the face of a potential future change in the applied tax allocation system.
{"title":"Formula Apportionment or Separate Accounting? Tax-Induced Distortions of Multinationals' Locational Investment Decisions","authors":"R. Ortmann, Erich Pummerer","doi":"10.2139/ssrn.2688090","DOIUrl":"https://doi.org/10.2139/ssrn.2688090","url":null,"abstract":"We examine which tax allocation system leads to more severe distortions with respect to locational investment decisions. We consider separate accounting (SA) and formula apportionment (FA). The effects of both systems have been hotly debated in Europe in the past years. The reason is that the EU Member States are striving to implement a common European tax system that would lead to a switch from SA to FA. While existing studies focus primarily on the impact of taxes on locational decisions under either SA or FA, the main innovation of this paper is that it compares both systems with regard to the level of distortions they induce. We compare the optimal pre-tax investment decision with the optimal after-tax investment decision and infer from the difference in the allocation of investment funds which tax allocation system causes more severe distortions. We assume that the multinational group (MNG) has comprehensive book income shifting opportunities under SA. We find that the investment incentives under SA are opposed to those under FA for a profitable investment project. Whereas under SA as much as possible should be invested in a high-tax country, under FA as much as possible should be invested in a low-tax country. The distortions of locational investment decisions tend to be more severe under SA than under FA if a greater share of investment funds is to be invested in a low-tax country from a pre-tax perspective and the investment is profitable. Vice versa, locational decisions may be more distorted under FA if the optimal pre-tax investment decision requires investing a major share of funds in the high-tax country. In contrast to the often stated insensitivity of FA towards income shifting, we find the introduction of a tax allocation system based on FA in Europe could lead to a severe shift of economic substance to low-tax countries. The results of this paper are of particular interest for European policy makers and MNGs as our findings may induce European MNGs to reassess their recent locational investment decisions in the face of a potential future change in the applied tax allocation system.","PeriodicalId":385233,"journal":{"name":"FEN: Differences in Taxation & Corporate Finance (Topic)","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"1900-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126730585","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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