Economic modelling suggests that recent EU proposals for a common corporate tax base (CCTB) and a common consolidated corporate tax base with formula apportionment (CCCTB) would result a fairer and more efficient tax system whilst maintaining, and perhaps improving GDP and welfare, a paper released by the EU Commission October 27 concludes.
Working paper No. 66-2016 titled “Modelling corporate tax reform in the EU: New calibration and simulations with the CORTAX model” uses CORTAX (short for CORporate TAXation), a computable general equilibrium (CGE) model, describing the 28 countries of the European Union, the US, Japan, and a tax haven to provide an initial economic impact assessment of EU proposals for a CCTB, CCCTB.
CORTAX features different firm types and models many key features of corporate tax regimes, considering multinational profit shifting, investment decisions, loss compensation, and the debt-equity choice of firms. The report is based on simulations at various levels and with different parameters.
In first instance, the potential outcome of the policy options for the harmonisation of the corporate tax bases in the EU are examined, namely, the CCTB and CCCTB. These proposals to harmonize the tax base are assumed to be mandatory for multinationals only. Moreover, the tax base is harmonised and the corporate tax rate is adjusted to maintain constant corporate tax revenues ex-ante, i.e. prior to behavioural changes.
The results show that the common tax base simulations directly affect the cost of capital, which on average falls across the EU, boosting investment, and therefore driving the increase in GDP. This is particularly the case under CCTB. Wages and employment also rise, further stimulating GDP and welfare. The key benefits to multinationals are lower compliance costs, full use of loss carry forward allowances, and real change in production factors.
Then, the two proposed reforms are simulated together with proposals to reduce or eliminate the debt bias in corporate taxation.
The simulation combines the common tax base proposals with different designs for treating the tax-induced debt-bias, which is present in most corporate tax regimes.
In particular, the effects of introducing a comprehensive business income tax (CBIT), an allowance for corporate capital (ACC), and an allowance for corporate equity (ACE) reform in EU 28 member states on top of CCTB and CCCTB are simulated. Furthermore, the macroeconomic outcomes under different model specifications are taken into account.
The outcome shows an increase of welfare and GDP. When the ACE is in place, a bigger reduction of leverage and greater increase in GDP and welfare can be observed. The overall conclusion is that debt-bias reforms directly impact the tax base and the cost of capital exerting a multiplicative effect on GDP and welfare.
Another section covers a group of 10 sensitivity simulations. These simulations provide additional insights into the consequences of altering the model assumptions with regard to the parameter values and policy choices and offer a strong test of the robustness of the results.
Lastly, the key macroeconomic results are explained at the EU level and at the country level for all main and sensitivity simulations.
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Davide Anghileri
Davide Anghileri is a PhD candidate at the University of Lausanne, where he is writing his thesis on the attribution of profits to PEs. He researches transfer pricing issues and lectures for the Master of Advanced Studies in International Taxation and Executive Program on Transfer Pricing.
Anghileri, a Contributing Editor at MNE Tax, previously worked as a policy advisor to the Swiss government on BEPS issues.
Davide can be reached at [email protected].
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