CESifo Economic Studies Advance Access originally published online on June 18, 2007
CESifo Economic Studies 2007 53(2):329-361; doi:10.1093/cesifo/ifm012
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Reforming the Taxation of Multijurisdictional Enterprises in Europe*
ARPEGE/FUCaM, Catholic University of Mons, Belgium and Cesifo, e-mail: gerard{at}fucam.ac.be
In 2001, the European Commission proposed replacing the current system of taxation of multinational companies by the taxation of a consolidated base, computed at the level of all the European entities of a multinational enterprise, and then distributed for taxation purposes among the various jurisdictions in which these entities operate, according to pre-established criteria. In this article, we propose a discussion, especially focusing on two related issues, the choice of the formula and the composition of the consolidating area—either the entire European Union (EU) or some Member States within an Enhanced Cooperation Agreement—, as well as on their impact on the size and distribution of tax revenue and economic activity, and on the intensity of tax competition. Our tentative policy conclusion is that the reform deserves support provided that (i) the formula puts emphasis on criteria that the firm may not too easily manipulate, (ii) the activities of the multijurisdictional enterprise are enough mobile, (iii) the consolidation is made compulsory within the consolidating area and (iv) the consolidating area protects its capacity to actually levy tax by adopting a crediting system vis-à-vis the rest of the world. (JEL code: H32, H73, H87)
Key Words: multinational enterprises • multinational companies • European taxation • tax consolidation • tax competition
* This article is based on a research started in the fall of 2004 at the Office of Tax Policy Research of the University of Michigan and completed during stays at Queen's University, Kingston, Ont., and CESifo, Munich, made possible of a grant from the Belgian Fonds National de la Recherche Scientifique and the generosity of CESifo. The stimulating hospitality of Robin Boadway as well as valuable suggestions and comments by Thiess Buettner, Carola Maggiuli, Alexander Klemm, Matthias Mors, Nicole Prieur, Jean-Pierre Vidal, Frans van Istendael and anonymous referees are gratefully acknowledged.