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ETPF Research Phase 1
The effects of international taxation on business
1
The effects of international taxation on the activities of multinational companies: a survey of existing
evidence & data sources
2 How are plant location decisions and capital flows in Europe affected by corporate income taxes?
3 How far do differences in international tax regimes between countries affect financial policies?
4 Profit shifting within the EU: evidence from Germany
5 Do non-profit taxes affect the location of economic activity? Evidence from the EU
6 An economic analysis of ECJ judgements on corporate income taxes in the EU
7 Economic analysis of proposals for a Common Consolidated Corporate Tax Base (CCCTB)
1
The effects of international taxation on the activities of multinational companies: a survey of existing
evidence & data sources
There has been a considerable amount of economics research into the impact of taxes on multinational companies. The main issues examined have been the impact on location choice, investment, financial policy and the location of profit. The bulk of this research has been undertaken by US researchers, primarily using data originating from the US. Over time this work has become more sophisticated and has used more and more detailed data.
This survey will provide a critical summary and evaluation of existing work. Two aspects are particularly important in trying to set the scene for the new research being commissioned. First, what are the strengths and weaknesses of existing work? The survey is likely to be critical of some existing work, particularly in the many attempts to gauge the impact of taxes on investment decisions. Second, to what extent does existing work provide useful information about the role of taxes in Europe?
Professor Michael Devereux, University of Warwick, UK
Research
Paper - The Impact of Taxation on the Location of Capital, Firms and Profit: A Survey of Empirical Evidence
Research Paper Data Appendix
Giorgia Maffini, University of Warwick
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How are plant location decisions and capital flows in Europe affected by corporate income taxes?
There is a significant literature examining the determinants of flows of foreign direct investment. However, with respect to examining the role of taxes, this literature is deficient in a number of ways. Of particular relevance here, it does not analyse the details of business decisions, which include both discrete choices
(e.g. to locate in country A or B) and continuous choices (e.g. how much investment to undertake, conditional on having chosen the location). The measure of tax relevant for these two decisions are, in principle, different: the first depends on an average tax rate, and the second on a marginal tax rate.
This paper will conduct a more detailed analysis of the importance of these different types of decision, and the importance of different forms of effective tax rate. It will use data on the foreign operations of US multinational firms, aggregated within each source country. Specifically, it will examine the role played by the two forms of taxes on the size of the capital stock owned by US multinationals in each country.
Professor Ben Lockwood
Ben Lockwood is a leading figure in economics research in tax policy, and specifically international tax policy, who has published widely in leading journals. He is primarily a theorist, but more recently has moved towards empirical work.
Research
Paper - Taxes and the size of the foreign-owned capital stock: which tax rates matter?
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How far do differences in international tax regimes between countries affect financial policies?
There has been surprisingly little empirical research, especially in Europe, on how differences in tax rates between countries can affect business financial policies. Yet taxes are clearly a factor in how multinational companies determine their financial arrangements: the statutory tax rate determines the benefit of interest deductibility, and the form of integration of corporate and personal taxes may affect the value of dividends.
This paper would aim to develop empirical evidence of the role played by taxes; it would focus primarily on the role of differences in tax rates on the use of debt. It would use company level data from the dataset Amadeus, which contains standardised accounting data on a large number of companies across Europe, as well as data on their ownership. The paper would aim to consider how far differences in the use of debt are correlated with tax rates in the countries of the subsidiary and parent, and whether the effects depend on the taxation of outbound investment by the parent�s country.
Professor Harry Huizinga, University of Tilburg, Netherlands
Harry Huizinga�s main area of research is the role played by taxes in various aspects of finance, for example, the taxation of banking, deposit insurance and international flows of interest. He has also written on corporate income taxes. For 3 years from 2000 to 2003 he was an Economic Adviser in the Directorate General for Economic and Financial Affairs at the European Commission.
Research
Paper - Capital Structure and International Debt Shifting in Europe
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Profit shifting within the EU: evidence from
Germany
A large part of government policy making with respect to international taxes on business is devoted to identifying where profit is located, and preventing excessive shifting of profits between jurisdictions. A number of recent academic papers have appeared recently which have attempted to estimate the relationship between tax rates and the location of profit. None of these has specifically addressed the European situation.
This paper will use detailed data, originally collected by the Bundesbank, on the activities of firms located in Germany, which includes the ownership structure of those firms. Thus, for example, it is possible to compare rates of profit of German subsidiaries of foreign multinational companies (further split by nationality of the parent and the existence of subsidiaries in other countries) with the rates of profit of domestic firms.
Professor Alfons Weichenreider, University of Frankfurt, Germany
Alfons Weichenreider originally trained at the University of Munich with Professor Hans Werner Sinn. He has published widely on international aspects of corporate income tax, and is one of the leading researchers in Europe undertaking empirical work in this field.
Research
Paper - Profit Shifting in the EU: Evidence from Germany
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Do non-profit taxes affect the location of economic activity?
Evidence from the
EU
The vast majority of economics research on the impact of taxes on the behaviour of multinational firms has focused on the role of corporate income taxes. This is for sound theoretical reasons; the basic model used in most work implies that other taxes � such as VAT or payroll taxes � are not ultimately borne by the company, and do not affect investment or financial policy. However, a recent paper (by Professor Jim Hines and co-authors) presented empirical evidence of an effect of �indirect� taxes on investment decisions. (In this paper, �indirect taxes� included all non-profit taxes).
This paper would reinvestigate this question. It would go beyond the paper by Hines
et al in two ways. First, it would analyse rigorously the economic conditions under which non-income taxes might affect investment decisions. Second, it would use data on different forms of European taxes to investigate which taxes (if any) play a role.
This paper would use the same Bundesbank data as the paper by Weichenreider. Specifically, it would examine the location of subsidiaries of German companies to examine the role played both by profits taxes and non-profits taxes.
Professor Thiess Buettner, University of Mannheim, Germany
Professor Buettner has written widely on cross-border issues of tax policy, at international and sub-national level. He recently left the leading international research centre, ZEW, in Mannheim, to take up a Professorship at the University of Munich, where he is the Head of the Public Finance programme at the IFO research centre.
Research
Paper Summary
Research Paper - The Impact of Non-Profit Taxes on Foreign Direct Investment: Evidence from German Multinationals
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An economic analysis of ECJ judgements on corporate income taxes in the EU
This is the �policy paper� for the first phase of the research, and as such is rather different from the other papers. It will address two broad issues. First, it will provide an economic analysis of the approach taken by the ECJ, and to a lesser extent, the European Commission. To what extent is the approach (for example, to prohibit discrimination in taxation of international activities compared to wholly domestic activities) consistent with economically-desirable features of an international tax system? And more fundamentally, is even the continued existence of a separate accounting, source-based, tax system consistent with the ECJ�s approach? Second, given the absence of any likelihood of a single EU-wide corporate income tax, what are the economic consequences of intermediate possibilities, such as a common corporate income tax being agreed among a subset of EU countries?
Professor Stephen Bond, University of Oxford, UK
Stephen Bond is Professor of Economics at Oxford, and Research Fellow at the Institute for Fiscal Studies. He is well know as a commentator on tax policy in the UK and Europe. He has a distinguished record as a researcher, and apart from his work on tax policy, is well known for his empirical work on investment, productivity and finance.
Research
Paper - Corporate Income Taxes in the EU: An Economic Assessment of the Role of the ECJ
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7
Economic analysis of proposals for a Common Consolidated Corporate Tax Base
(CCCTB)
The European Commission is currently working on ways to remove tax obstacles for companies operating in more than one jurisdiction in the EU, specifically on paths towards providing such companies with a single integrated tax basis for all their EU activities: the
Common Consolidated Corporate Tax Base (CCCTB).
One important aspect of a CCCTB would be how the level and distribution of effective tax rates (ETR) on capital income in Europe would be affected. Ultimately, of course, this depends on the form which a CCCTB would take, and the tax rates which would be associated with it. But it is possible to address this in anticipation of various possible forms of tax.
The central approach of the project would be to estimate ETRs for some particular forms of investment. The project would begin by attempting to estimate such rates based on existing legislation. The general approach used cannot take into account all the technicalities of international tax. However, the intention would be to significantly extend existing work in this area by allowing for a number of factors which are usually ignored, including distinguishing between subsidiaries and branches, allowing for losses, and allowing for common means of tax planning.
These ETRs could then be compared to those likely under a CCCTB (one way of doing this would be to assume that the most generous provision existing in a Member State's tax law is adopted, and then contrast this with the least generous provision currently in another Member State's law). Even holding tax rates unchanged, significant differences in ETRs could arise due to new treatment of losses and the effects of a single tax base on tax planning opportunities. These factors are likely to affect effective tax rates in different ways.
European Union
CCCTB page
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