Some Open Negotiation
Issues Involving a
CCCTB in the EU
Jack Mintz and Joann Weiner
NYU – UConn EC Tax Symposium
March 14, 2008
The CCCTB in the EU
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A new era of company taxation in the EU
Common Consolidated Corporate Tax Base
Formulary Apportionment
Pressures to coordinate tax policies coming
from the ECJ, globalization, tax competition
Business pressure to have an option
Apply a new cooperative approach
Game Theory
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EU member states are players
Each player chooses and action and strategy to
maximize payoffs
Gov’t payoffs are revenue, efficiency gains, and
distributive impacts
Game is finite, but it is repeated
Players have incomplete information
Characteristics of a cooperative
game
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Pareto-optimality
- can’t improve on the outcome
Coalition-stability
- subset can not block
Individual rationality
- cooperation better than competition
Side-payments
- expands possible outcomes
EU Examples of Cooperative Game
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MS reach an agreement that can not make one
better with making another worse off
Sub-set of MS can proceed with enhanced
cooperation
Each MS enters agreement only if it does better
from its point of view
Commission can make side-payments to
encourage cooperation
Non-cooperative outcome
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MS act independently with fiscal policies
Tax rates may be too high or too low
Public services may be too high or too low
Can have a “leader” who moves first and leads
to subgame perfect equilibrium
The players
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Do players include private sector and citizens?
Could private sector block the cooperative
agreement if not included in the process?
Which governments participate?
Who are the residents and qualified to play?
Which rules determine residency?
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Permanent establishment
Central management and control
Carrying on a business
The payoffs
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What do govts maximize:
---- welfare of their citizens?
---- tax revenue, i.e., are they Leviathan?
---- political rents?
How do govts interact with one another?
Global or national objectives?
Negotiations and Fairness
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Reciprocity
Nash bargaining game
Maximize the aggregate product of welfare
gains from cooperation
Weights determined by bargaining strengths
Participants care about how tax base is shared
Rules of the Game
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No explicit international tax rules exist
Aim is to allocate worldwide tax base among
sovereign jurisdictions
Avoid double taxation
Solution can not require complete
harmonization
Current state of play
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EU Commission plans to issue proposal later
this year
Optional CCCTB with common formula
MS set national tax rates
The formula
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Commission supports multiple factor formula
Include tangible property, number of employees,
and employee compensation
Considerable uncertainty about including sales,
whether on destination or an origin basis
The territorial scope
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Worldwide with exemption
Subject to a switch-over clause
Alternative to CFC rules, which ECJ has
rejected
Over-ride existing intra-EU treaties
Renegotiate external treaties
The apportionment formula
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Balance interests of divergent member states
Factors should be easy to locate, hard to
manipulate, related to income
US states use variety of formulae with property,
payroll and sales
Many states apportion solely on sales
Canadian provinces use common two-factor
payroll and sales
Tax rates
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Narrow range of rates in the US
Wider range of rates in the EU
Distortions will not be the same given different
levels of rates and distribution of investment
Development of the formula
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States, which may freely choose formula, opt for
one that maximizes “business climate”
Most common formula is double-weighted sales
Provinces can not choose formula
50 years of stability leads to desire to maintain
certainty
Unresolved issues
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Sales: Should they be included?
If included, should they measured at origin or
destination?
How to prevent income-shifting?
Unresolved issues
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Intangibles
How to locate?
How to measure?
An alternative formula to
consider
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Divide each factor into two parts
Labor: Number of employees and
compensation
Property: Tangible and intangible property
Sales and gross receipts: Destination and Origin
Economic Impacts
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Distribution of US multinational operations
Distribution of a single company’s operations
Revenue
Possible revenue effects
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Devereux and Loretz
EU multinational company data from orbis
2000 to 2004
Ven der Horst, Betterndorf, and RojasRomagosa
General Equilibrium model
Conclusion
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EU is moving in the right direction in company
tax reform with a CCCTB and FA
EU MS may be able to reach a cooperative
outcome