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Cooperative Game Theory in EU Taxation: Negotiating a Common Corporate Tax Base

Explore the complexities of negotiating a Common Consolidated Corporate Tax Base (CCCTB) in the EU using Cooperative Game Theory. Understand the key issues, players, payoffs, rules, and ongoing negotiations shaping the future of company taxation in the EU. Discover the economic impacts and potential revenue effects of implementing a CCCTB. Learn how EU member states aim to collaborate to maximize welfare gains and fairness in tax policies.

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Cooperative Game Theory in EU Taxation: Negotiating a Common Corporate Tax Base

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  1. Some Open Negotiation Issues Involving a CCCTB in the EU Jack Mintz and Joann Weiner NYU – UConn EC Tax Symposium March 14, 2008

  2. The CCCTB in the EU • 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

  3. Game Theory • 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

  4. Characteristics of a cooperative game • 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

  5. EU Examples of Cooperative Game • 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

  6. Non-cooperative outcome • 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

  7. The players • 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? • Permanent establishment • Central management and control • Carrying on a business

  8. The payoffs • 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?

  9. Negotiations and Fairness • 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

  10. Rules of the Game • 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

  11. Current state of play • EU Commission plans to issue proposal later this year • Optional CCCTB with common formula • MS set national tax rates

  12. The formula • 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

  13. The territorial scope • 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

  14. The apportionment formula • 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

  15. Tax rates • 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

  16. Development of the formula • 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

  17. Unresolved issues • Sales: Should they be included? • If included, should they measured at origin or destination? • How to prevent income-shifting?

  18. Unresolved issues • Intangibles • How to locate? • How to measure?

  19. An alternative formula to consider • Divide each factor into two parts • Labor: Number of employees and compensation • Property: Tangible and intangible property • Sales and gross receipts: Destination and Origin

  20. Economic Impacts • Distribution of US multinational operations • Distribution of a single company’s operations • Revenue

  21. Possible revenue effects • Devereux and Loretz • EU multinational company data from orbis • 2000 to 2004 • Ven der Horst, Betterndorf, and Rojas-Romagosa • General Equilibrium model

  22. Conclusion • 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

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