Some Open Some Open Negotiation Issues Negotiation Issues Involving a CCCTB Involving a CCCTB

in the EUin the EUJack Mintz and Joann WeinerJack Mintz and Joann Weiner

NYU – UConn EC Tax NYU – UConn EC Tax SymposiumSymposium

March 14, 2008March 14, 2008

The CCCTB in the EUThe CCCTB in the EU

A new era of company taxation in the EUA new era of company taxation in the EU Common Common ConsolidatedConsolidated Corporate Tax Corporate Tax

BaseBase Formulary ApportionmentFormulary Apportionment Pressures to coordinate tax policies Pressures to coordinate tax policies

coming from the ECJ, globalization, tax coming from the ECJ, globalization, tax competitioncompetition

Business pressure to have an optionBusiness pressure to have an option Apply a new Apply a new cooperativecooperative approach approach

Game TheoryGame Theory

EU member states are playersEU member states are players Each player chooses and action and Each player chooses and action and

strategy to maximize payoffsstrategy to maximize payoffs Gov’t payoffs are revenue, efficiency Gov’t payoffs are revenue, efficiency

gains, and distributive impactsgains, and distributive impacts Game is finite, but it is repeatedGame is finite, but it is repeated Players have incomplete informationPlayers have incomplete information

Characteristics of a Characteristics of a cooperative gamecooperative game

Pareto-optimality Pareto-optimality - can’t improve on the outcome- can’t improve on the outcome

Coalition-stabilityCoalition-stability- subset can not block- subset can not block

Individual rationalityIndividual rationality- cooperation better than competition- cooperation better than competition

Side-paymentsSide-payments- expands possible outcomes- expands possible outcomes

EU Examples of Cooperative EU Examples of Cooperative GameGame

MS reach an agreement that can not MS reach an agreement that can not make one better with making another make one better with making another worse offworse off

Sub-set of MS can proceed with Sub-set of MS can proceed with enhanced cooperationenhanced cooperation

Each MS enters agreement only if it Each MS enters agreement only if it does better from its point of view does better from its point of view

Commission can make side-payments Commission can make side-payments to encourage cooperationto encourage cooperation

Non-cooperative Non-cooperative outcomeoutcome

MS act independently with fiscal MS act independently with fiscal policiespolicies

Tax rates may be too high or too lowTax rates may be too high or too low Public services may be too high or Public services may be too high or

too lowtoo low Can have a “leader” who moves first Can have a “leader” who moves first

and leads to subgame perfect and leads to subgame perfect equilibriumequilibrium

The playersThe players Do players include private sector and Do players include private sector and

citizens?citizens? Could private sector block the cooperative Could private sector block the cooperative

agreement if not included in the process?agreement if not included in the process? Which governments participate?Which governments participate? Who are the residents and qualified to Who are the residents and qualified to

play?play? Which rules determine residency?Which rules determine residency?

- Permanent establishmentPermanent establishment- Central management and controlCentral management and control- Carrying on a businessCarrying on a business

The payoffsThe payoffs

What do govts maximize: What do govts maximize:

---- welfare of their citizens?---- welfare of their citizens?

---- tax revenue, i.e., are they ---- tax revenue, i.e., are they Leviathan?Leviathan?

---- political rents?---- political rents? How do govts interact with one How do govts interact with one

another?another? Global or national objectives?Global or national objectives?

Negotiations and Negotiations and FairnessFairness

ReciprocityReciprocity Nash bargaining gameNash bargaining game Maximize the aggregate product of Maximize the aggregate product of

welfare gains from cooperationwelfare gains from cooperation Weights determined by bargaining Weights determined by bargaining

strengthsstrengths Participants care about how tax base Participants care about how tax base

is sharedis shared

Rules of the GameRules of the Game

No explicit international tax rules No explicit international tax rules existexist

Aim is to allocate worldwide tax base Aim is to allocate worldwide tax base among sovereign jurisdictionsamong sovereign jurisdictions

Avoid double taxationAvoid double taxation Solution can not require complete Solution can not require complete

harmonizationharmonization

Current state of playCurrent state of play

EU Commission plans to issue EU Commission plans to issue proposal later this yearproposal later this year

Optional CCCTB with common Optional CCCTB with common formulaformula

MS set national tax ratesMS set national tax rates

The formulaThe formula

Commission supports multiple factor Commission supports multiple factor formulaformula

Include tangible property, number of Include tangible property, number of employees, and employee employees, and employee compensationcompensation

Considerable uncertainty about Considerable uncertainty about including sales, whether on including sales, whether on destination or an origin basisdestination or an origin basis

The territorial scopeThe territorial scope

Worldwide with exemptionWorldwide with exemption Subject to a switch-over clauseSubject to a switch-over clause Alternative to CFC rules, which ECJ Alternative to CFC rules, which ECJ

has rejectedhas rejected Over-ride existing intra-EU treatiesOver-ride existing intra-EU treaties Renegotiate external treatiesRenegotiate external treaties

The apportionment The apportionment formulaformula

Balance interests of divergent member Balance interests of divergent member statesstates

Factors should be easy to locate, hard Factors should be easy to locate, hard to manipulate, related to incometo manipulate, related to income

US states use variety of formulae with US states use variety of formulae with property, payroll and salesproperty, payroll and sales

Many states apportion solely on salesMany states apportion solely on sales Canadian provinces use common two-Canadian provinces use common two-

factor payroll and salesfactor payroll and sales

Tax ratesTax rates

Narrow range of rates in the USNarrow range of rates in the US Wider range of rates in the EUWider range of rates in the EU Distortions will not be the same Distortions will not be the same

given different levels of rates and given different levels of rates and distribution of investmentdistribution of investment

Development of the Development of the formulaformula

States, which may freely choose States, which may freely choose formula, opt for one that maximizes formula, opt for one that maximizes “business climate”“business climate”

Most common formula is double-Most common formula is double-weighted sales weighted sales

Provinces can not choose formulaProvinces can not choose formula 50 years of stability leads to desire 50 years of stability leads to desire

to maintain certaintyto maintain certainty

Unresolved issuesUnresolved issues

Sales: Should they be included?Sales: Should they be included? If included, should they measured at If included, should they measured at

origin or destination?origin or destination? How to prevent income-shifting?How to prevent income-shifting?

Unresolved issuesUnresolved issues

IntangiblesIntangibles How to locate?How to locate? How to measure?How to measure?

An alternative formula to An alternative formula to considerconsider

Divide each factor into two partsDivide each factor into two parts Labor: Number of employees and Labor: Number of employees and

compensationcompensation Property: Tangible and intangible Property: Tangible and intangible

propertyproperty Sales and gross receipts: Sales and gross receipts:

Destination and OriginDestination and Origin

Economic ImpactsEconomic Impacts

Distribution of US multinational Distribution of US multinational operationsoperations

Distribution of a single company’s Distribution of a single company’s operationsoperations

RevenueRevenue

Possible revenue effectsPossible revenue effects

Devereux and LoretzDevereux and Loretz EU multinational company data from EU multinational company data from

orbisorbis 2000 to 20042000 to 2004 Ven der Horst, Betterndorf, and Ven der Horst, Betterndorf, and

Rojas-RomagosaRojas-Romagosa General Equilibrium modelGeneral Equilibrium model

ConclusionConclusion

EU is moving in the right direction EU is moving in the right direction in company tax reform with a in company tax reform with a CCCTB and FACCCTB and FA

EU MS may be able to reach a EU MS may be able to reach a cooperative outcome cooperative outcome