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Why the European Union Should Adopt Formula Apportionment with a Sales Factor*
Authors:Thomas Eichner  Marco Runkel
Institution:1. University of Bielefeld, D‐33501 Bielefeld, Germany teichner@wiwi.uni‐bielefeld.de;2. University of Magdeburg, D‐39016 Magdeburg, Germany marco.runkel@ovgu.de
Abstract:Using a two‐country tax competition model with a multinational enterprise (MNE), this paper addresses the question of whether the European Union should replace separate accounting (SA) in corporate income taxation by formula apportionment (FA) and, if so, which apportionment factors should be used. Our main result is that FA with a sales factor may mitigate or even eliminate fiscal externalities caused by the countries' tax policy. Hence, our analysis provides a microfoundation for the sales apportionment factor. In an empirical calibration to the EU‐15 we show that the transition from SA to FA with a sales‐only formula raises average tax rates by 2% and average tax revenues by 1 billion euros or 0.1% of GDP. These effects result in an increase of welfare.
Keywords:Separate accounting  formula apportionment  apportionment factors  H7  H73
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