Reforming the Taxation of Multijurisdictional Enterprises in Europe

In 2001, the European Commission proposed replacing the currentsystem of taxation of multinational companies by the taxationof a consolidated base, computed at the level of all the Europeanentities of a multinational enterprise, and then distributedfor taxation purposes among the various jurisdictions in whichthese entities operate, according to pre-established criteria.In this article, we propose a discussion, especially focusingon two related issues, the choice of the formula and the compositionof 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 taxrevenue and economic activity, and on the intensity of tax competition.Our tentative policy conclusion is that the reform deservessupport provided that (i) the formula puts emphasis on criteriathat the firm may not too easily manipulate, (ii) the activitiesof the multijurisdictional enterprise are enough mobile, (iii)the consolidation is made compulsory within the consolidatingarea and (iv) the consolidating area protects its capacity toactually levy tax by adopting a crediting system vis-à-visthe rest of the world. (JEL code: H32, H73, H87)