Transfer Pricing or Formula Apportionment? Tax‐Induced Distortions of Multinationals’ Investment and Production Decisions*

Martini, Jan Thomas; Niemann, Rainer; Simons, Dirk

doi:10.1111/j.1911-3846.2012.01140.x

Cited by 31 publications

(12 citation statements)

References 47 publications

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“…This merits more careful examination in future research so that the overall tax effects in a dynamic setting that may arise as a consequence of the transition to the new system, can be anticipated. 40 Prior analytical studies focus mainly on the tax base allocation influenced by income shifting (see Nielsen et al 2010;Gérard and Princen 2012;Martini et al 2012). …”

Section: Resultsmentioning

confidence: 99%

Can the CCCTB alleviate tax discrimination against loss-making European multinational groups?

Ortmann

Sureth-Sloane

2016

J Bus Econ

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In March 2011, the European Commission submitted a proposal for a Council Directive on an optional common consolidated corporate tax base (CCCTB). If this proposed CCCTB system comes into force, taxes calculated under the currently existing system of separate accounting might be replaced by a system of group consolidation and formulary apportionment. Then, multinational groups (MNGs) would face the decision as to whether to opt for the CCCTB system. Prior research focuses mainly on the differences in economic behaviour under both systems in general. By contrast, we study the conditions under which one or the other tax system is preferable from the perspective of an MNG, with a particular focus on loss-offsets. We identify four effects that determine the decision of an MNG: the tax-utilization of losses, the allocation of the tax base, the dividend and intragroup interest taxation. We find mixed results, e.g., that the CCCTB system proves advantageous for increasing loss/profit streams (e.g. from start-ups or R&D projects) of the individual group entities, whereas the system of separate accounting is beneficial for decreasing profit/loss streams (e.g. caused by a decrease in return from a mature product). The results of our analysis are helpful for MNGs facing the decision as to whether to opt for the CCCTB system and can also support legislators and politicians in the EU but also in other regions in their tax reform discussions. JEL classification: H25, H21

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Section: Resultsmentioning

confidence: 99%

Can the CCCTB alleviate tax discrimination against loss-making European multinational groups?

Ortmann

Sureth-Sloane

2016

J Bus Econ

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“…In line with this argumentation, recent research on the German local business tax, where payroll is the exclusive FA factor, interprets correlations between tax rates and payroll costs as evidence for a distortion in real business activity (e.g., Riedel, 2010;Thomsen et al, 2014). FA tax effects are assumed not to be driven by "artificial" tax avoidance strategies (Riedel & Runkel, 2007, Martini et al, 2012, Clausing, 2013. Clausing and Lahav (2011) argue: "While accounting manipulations can easily shift profits of low-tax countries under a separate accounting system, that is not the case under a formulary system."…”

Section: Introductionmentioning

confidence: 99%

“…Whereas it is challenging to find direct evidence for FA tax avoidance, our results on tax avoidance proxies suggest a tax-induced manipulation of payroll expense as FA factor. While the allocation of income among jurisdictions under SA tax regimes is strongly affected by profit shifting strategies of multinationals (Dharmapala, 2014), FA has been regarded as less vulnerable to tax avoidance practices (Riedel & Runkel, 2007, Altshuler & Grubert, 2010, Clausing & Lahav, 2011, Martini et al, 2012, Clausing, 2013. Taking into account evidence on FA tax avoidance for the sales factor in the U.S. (Klassen & Shackelford, 1998, Gupta & Mills, 2002, payroll expense may appear to be a particularly suitable and tax-planning robust apportionment factor.…”

Section: Introductionmentioning

confidence: 99%

Formula Apportionment: Factor Allocation and Tax Avoidance

Eichfelder

Hechtner

Hundsdoerfer

2017

European Accounting Review

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in Formula Apportionment:Factor Allocation and Tax Avoidance Abstract This paper addresses the question of how firms react to tax incentives in a formula apportionment (FA) tax regime. Under FA, profits of all consolidated entities of a business group are summed and then allocated according to a formula based on FA factors. We hypothesize that firms may change the allocation of real production factors and/or manipulate the FA factor through tax avoidance strategies. Analyzing FA tax effects of the German local business tax with payroll expense as the exclusive FA factor, we find empirical evidence consistent with both hypotheses. Regarding the allocation of production factors, we observe significant tax effects on labor input at the intensive margin but not on labor input at the extensive margin. In addition, we find evidence of an indirect FA spillover effect on capital investment. Our findings on tax avoidance proxies are consistent with tax-induced manipulations of payroll expense as FA factor in order to save tax payments.

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“…12 Among the few FA studies considering firm-specific properties of MJEs, like decentralization, delegation, and incentivisation, Nielsen/Raimondos-Møller/Schjelderup (2008) show that decision structures are influenced by tax parameters. Martini/Niemann/Simons (2012) prove that the effects of FA on production and investment decisions crucially depend on the accounting system in place and the mechanism defining how taxes are allocated to the subsidiaries of a MJE.…”

Section: Introductionmentioning

confidence: 99%

Management Incentives Under Formula Apportionment Tax-Induced Distortions of Effort and Compensation in a Principal-Agent Setting

2014

Self Cite

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The introduction of a common consolidated corporate tax base (CCCTB) and tax allocation via formula apportionment (FA) is hotly debated in the European Union (EU) since more than a decade. While the literature has thoroughly analyzed the economic effects of FA from a macro-level perspective, the firm view has been added only recently. Within this micro-level framework discussing possible tax-induced distortions of multi-jurisdictional entities' (MJE) decisions becomes feasible. Anticipating the reactions of MJEs to the introduction of FA requires considering delegation and incentivisation, because management decisions are influenced by principal agent relationships. How FA affects the demand for managerial effort is a hitherto neglected research question. Accordingly, the objective of this paper is to highlight the tax-induced distortions of managerial incentives caused by FA. For this purpose we set up a LEN-type principal-agent model with agents in two different jurisdictions. Terms of use: Documents inCompared to the case with separate taxation (ST) the principal demands increased effort and pays an increased compensation to managers in low-tax jurisdictions, if payroll enters the FA formula. Managers in high-tax jurisdictions face the opposite effect. Further, the composition of the compensation packages changes. Overall, net profit increases, because FA offers potential for profit shifting.JEL-Code: H250, M410.

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Transfer Pricing or Formula Apportionment? Tax‐Induced Distortions of Multinationals’ Investment and Production Decisions*

Cited by 31 publications

References 47 publications

Can the CCCTB alleviate tax discrimination against loss-making European multinational groups?

Can the CCCTB alleviate tax discrimination against loss-making European multinational groups?

Formula Apportionment: Factor Allocation and Tax Avoidance

Management Incentives Under Formula Apportionment Tax-Induced Distortions of Effort and Compensation in a Principal-Agent Setting

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