The Revenue Consequences of Using CCCTB to Determine Taxable Income in the EU Member States

1. The Revenue Consequences of Using CCCTB to Determine Taxable Income in the EU Member States Andreas Oestreicher/Reinald Koch Institute for Domestic and International Taxation University of Goettingen Reinald Koch University of Goettingen

2. Outline Basic tax principles Data and methodology Empirical results of the Microsimulation Investigation of influencing factors Conclusion and outlook Page 2 Reinald Koch University of Goettingen

3. Basic tax principles: Prevailing tax law 27 separate tax systems: compliancecosts Arm‘slengthprinciple: compliancecosts, potential double taxation Taxation of intra-groupprofits: timingdisadvantages Intra-grouplossoffsetusually limited todomesticgroups: timingor permanent disadvantages Dividend taxation: potential double taxation Reinald Koch University of Goettingen

4. Basic tax principles: Proposal by the European Commission Study (2001) on tax obstacles in the Internal Market Proposal: Introducing a Common Consolidated Corporate Tax Base Harmonisation of tax accountingrules Determination of taxableincome on a consolidatedbasis Attribution of incomeaccordingto a uniform formula Applicationcompulsoryor optional Elimination of tax obstacles on a conceputal basis! Reinald Koch University of Goettingen

5. Basic tax principles: Proposalbythe European Commission Example * Value of loss carry-forward: 18 Reinald Koch University of Goettingen

6. Data and MethodologyData Database AMADEUS consolidatedandunconsolidatedfinancialstatements; companyprofiles aboutninemillion European Companies Update 125 (February 2005) Periodcovered: 1994-2003 Companies included Group companies (Control-Konzept) Companies withincompleteinformationexcluded Number of companiesincluded: 294,572 (23 Member States) Reinald Koch University of Goettingen

7. Data and MethodologyMethodology • Three-stepanalysis: • Backward-lookingdetermination of revenueconsequencesbyapplying a comparativestaticmicrosimulation • Investigation of thefactors of influencefortheestimatedrevenueeffects (bivariate/multivariate regression) • Forward lookingestimation of futurerevenueeffects on thebasis of theregressionequation Reinald Koch University of Goettingen

8. Data and MethodologyMicrosimulation Model Part of a jointresearchprojectwiththe Center for European Economic Studies (fundedbythe German Research Foundation) Comparative-staticmicrosimulation Tax revenue = total of profit tax paymentsmadebygroupcompanies Indirectdetermination of tax paymentsstartingfromprofit/lossbefore tax Adjustmentsmadeforinterperiod-lossoffset, intra-grouploss-offset, dividendtaxation Applied Tax law: Tax rates 1994-2003 Other provisions 2006 Reinald Koch University of Goettingen

9. Data and MethodologyMeasures included in simulation Harmonisation of tax accounting rules Elimination of intra-group profits Non-taxation of intra-group dividends Crossborder intra-group loss offset Reallocation of tax base Reinald Koch University of Goettingen

10. Results of the microsimulationEU wide revenue effects Reinald Koch University of Goettingen

11. Results of the microsimulationMember state specific revenue effects Reinald Koch University of Goettingen

12. Investigation of the factors of influenceIndependent variables Reinald Koch University of Goettingen

13. Investigation of the factors of influenceRegression results Reinald Koch University of Goettingen

14. Conclusion and Outlook Main results: EU tax revenueisreducedby 4.45 percent (compulsory CCCTB) and 4.57 percent (optional CCCTB) Member State specificeffectdependsespecially on theavailability of a grouptaxationregime in prevailing tax law, the nominal tax rate and theintroductionofoptionality But: How do companies react to such a tax reform?  Inclusion of behavioral responses = current work Reinald Koch University of Goettingen