Sharing the corporate tax base: Equitable taxing of multinationals and the choice of formulary apportionment

Abstract

Tax avoidance by multinational enterprises (MNEs) is a global problem. Most crossborder trade occurs within MNEs, susceptible to abuse of gaps and loopholes in domestic and international tax law that allow "profit shifting" between fiscal jurisdictions in order to reduce corporate tax liability. A lack of transparency makes this kind of tax avoidance difficult to quantify -let alone to monitor and control. This paper provides a case study of profit shifting using publicly available, unique, country-by-country reporting data for Vodafone Group Plc, the first large MNE to voluntarily publish such data. We show the tax impact of a move to formulary apportionment on a global basis, and under the European Union's Common Consolidated Corporate Tax Base proposal. We also consider the rationale for the current proposals for apportionment factors and propose an alternative.

Corporate Income Taxation and Inequality: Review and Discussion of Issues Raised in The triumph of injustice—How the rich dodge taxes and how to make them pay (2019)☆

“…Also there is a strong and statistically significant relationship between countries’ tax rates and the prices of intrafirm transactions (Bartelsman and Beetsma, 2003; Clausing, 2003). Thus, multinationals can shift profits from high‐ to low‐tax countries through intragroup financing (Faccio and FitzGerald, 2018) and trade in goods and services (Bartelsman and Beetsma, 2003; Cristea and Nguyen, 2016; Wier, 2020), thereby reducing the corporate tax base.…”

Lifestyle Taxes in the Presence of Profit Shifting

“…Once the latter is determined, it will be allocated among countries according to some apportionment formula (DeMooij et al ( 2019); Eichner & Runkel (2008); Faccio & FitzGerald (2018)). If this collaboration is successful, multinational industries will nd it quite dicult to shift prots across countries.…”

“…In the quest to reduce prot shifting, over 130 countries are developing common strategies to reduce tax avoidance, following dierent strategies (Devereux & Sorensen (2006); Bunn et al (2019)). Once the tax base has been determined, it will be allocated among countries with an apportionment formula on which the discussion is very lively (DeMooij et al (2019); Eichner & Runkel (2008); Faccio & FitzGerald (2018)). We show that the reforms proposed to ght prot shifting allow countries to set a lifestyle tax closer to FB.…”

Multinational enterprises and economic inequality

“…The study by Faccio and Fitzgerald (2018) of taxation of MNEs also refers to inequality, noting that debates on international taxation should link up to other global debates on income inequality, sustainable development and multilateral institutions. Their case study of Vodafone considering the implications of different formula apportionment approaches for taxation of MNEs provides important insights on equity outcomes (notably between developed and developing countries).…”