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Allowing firms to choose between separate accounting and formula apportionment taxation

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  • Gresik, Thomas A.
Abstract
This paper analyzes the effect on firm behavior and national tax revenues of allowing multinational firms to choose to be taxed under separate accounting rules or an apportionment formula. Separate accounting always generates more profitable output and conditional labor demand distortions from tax differentials while either method can generate a more profitable income-shifting distortion. Both low-cost and high-cost firms can prefer separate accounting while medium-cost firms prefer formula apportionment. With symmetric countries, a firm's preferred method generates greater tax revenues in the country with the lower tax rate. With asymmetric countries, a firm's preferred method need no longer generate greater tax revenues in the lower-tax-rate country due to the fact that countries and firms now value tax base distortions differently. With this misalignment of preferences, some firms can choose the preferred method of both countries at fixed tax rates.

Suggested Citation

  • Gresik, Thomas A., 2016. "Allowing firms to choose between separate accounting and formula apportionment taxation," Journal of Public Economics, Elsevier, vol. 138(C), pages 32-42.
    • Handle: RePEc:eee:pubeco:v:138:y:2016:i:c:p:32-42
    DOI: 10.1016/j.jpubeco.2016.04.002
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    References listed on IDEAS

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    Cited by:

    1. Mardan, Mohammed & Stimmelmayr, Michael, 2018. "Tax revenue losses through cross-border loss offset: An insurmountable hurdle for formula apportionment?," European Economic Review, Elsevier, vol. 102(C), pages 188-210.
    2. Rainer Niemann & Mariana Sailer, 2023. "Is analytical tax research alive and kicking? Insights from 2000 until 2022," Journal of Business Economics, Springer, vol. 93(6), pages 1149-1212, August.
    3. Regina Ortmann & Erich Pummerer, 2023. "Distortional effects of separate accounting and formula apportionment on factor allocation," Journal of Business Economics, Springer, vol. 93(8), pages 1277-1307, October.
    4. Chen, Xuyang & Hindriks, Jean, 2023. "Multinational Taxation under Pressure: The Role of Tax Deductibility," LIDAM Discussion Papers CORE 2023013, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    5. Sara L. McGaughey & Pascalis Raimondos, 2019. "Shifting MNE taxation from national to global profits: A radical reform long overdue," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 50(9), pages 1668-1683, December.

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    More about this item

    Keywords

    Separate accounting; Formula apportionment; Transfer prices; Firm choice;
    All these keywords.

    JEL classification:

    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • K34 - Law and Economics - - Other Substantive Areas of Law - - - Tax Law

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