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

The CCCTB in the EU A new era of company taxation in the EU A new era of company taxation in the EU Common Consolidated Corporate Tax Base Common Consolidated Corporate Tax Base Formulary Apportionment Formulary Apportionment Pressures to coordinate tax policies coming from the ECJ, globalization, tax competition Pressures to coordinate tax policies coming from the ECJ, globalization, tax competition Business pressure to have an option Business pressure to have an option Apply a new cooperative approach Apply a new cooperative approach

Game Theory EU member states are players EU member states are players Each player chooses and action and strategy to maximize payoffs Each player chooses and action and strategy to maximize payoffs Gov’t payoffs are revenue, efficiency gains, and distributive impacts Gov’t payoffs are revenue, efficiency gains, and distributive impacts Game is finite, but it is repeated Game is finite, but it is repeated Players have incomplete information Players have incomplete information

Characteristics of a cooperative game Pareto-optimality Pareto-optimality - can’t improve on the outcome Coalition-stability Coalition-stability - subset can not block Individual rationality Individual rationality - cooperation better than competition Side-payments Side-payments - expands possible outcomes

EU Examples of Cooperative Game MS reach an agreement that can not make one better with making another worse off MS reach an agreement that can not make one better with making another worse off Sub-set of MS can proceed with enhanced cooperation Sub-set of MS can proceed with enhanced cooperation Each MS enters agreement only if it does better from its point of view Each MS enters agreement only if it does better from its point of view Commission can make side-payments to encourage cooperation Commission can make side-payments to encourage cooperation

Non-cooperative outcome MS act independently with fiscal policies MS act independently with fiscal policies Tax rates may be too high or too low Tax rates may be too high or too low Public services 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 Can have a “leader” who moves first and leads to subgame perfect equilibrium

The players Do players include private sector and citizens? Do players include private sector and citizens? Could private sector block the cooperative agreement if not included in the process? Could private sector block the cooperative agreement if not included in the process? Which governments participate? Which governments participate? Who are the residents and qualified to play? Who are the residents and qualified to play? Which rules determine residency? Which rules determine residency? - Permanent establishment - Central management and control - Carrying on a business

The payoffs What do govts maximize: What do govts maximize: ---- welfare of their citizens? ---- tax revenue, i.e., are they Leviathan? ---- political rents? ---- political rents? How do govts interact with one another? How do govts interact with one another? Global or national objectives? Global or national objectives?

Negotiations and Fairness Reciprocity Reciprocity Nash bargaining game Nash bargaining game Maximize the aggregate product of welfare gains from cooperation Maximize the aggregate product of welfare gains from cooperation Weights determined by bargaining strengths Weights determined by bargaining strengths Participants care about how tax base is shared Participants care about how tax base is shared

Rules of the Game No explicit international tax rules exist No explicit international tax rules exist Aim is to allocate worldwide tax base among sovereign jurisdictions Aim is to allocate worldwide tax base among sovereign jurisdictions Avoid double taxation Avoid double taxation Solution can not require complete harmonization Solution can not require complete harmonization

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

The formula Commission supports multiple factor formula Commission supports multiple factor formula Include tangible property, number of employees, and employee compensation Include tangible property, number of employees, and employee compensation Considerable uncertainty about including sales, whether on destination or an origin basis Considerable uncertainty about including sales, whether on destination or an origin basis

The territorial scope Worldwide with exemption Worldwide with exemption Subject to a switch-over clause Subject to a switch-over clause Alternative to CFC rules, which ECJ has rejected Alternative to CFC rules, which ECJ has rejected Over-ride existing intra-EU treaties Over-ride existing intra-EU treaties Renegotiate external treaties Renegotiate external treaties

The apportionment formula Balance interests of divergent member states Balance interests of divergent member states Factors should be easy to locate, hard to manipulate, related to income Factors should be easy to locate, hard to manipulate, related to income US states use variety of formulae with property, payroll and sales US states use variety of formulae with property, payroll and sales Many states apportion solely on sales Many states apportion solely on sales Canadian provinces use common two-factor payroll and sales Canadian provinces use common two-factor payroll and sales

Tax rates Narrow range of rates in the US Narrow range of rates in the US Wider range of rates in the EU Wider range of rates in the EU Distortions will not be the same given different levels of rates and distribution of investment Distortions will not be the same given different levels of rates and distribution of investment

Development of the formula States, which may freely choose formula, opt for one that maximizes “business climate” States, which may freely choose formula, opt for one that maximizes “business climate” Most common formula is double-weighted sales Most common formula is double-weighted sales Provinces can not choose formula Provinces can not choose formula 50 years of stability leads to desire to maintain certainty 50 years of stability leads to desire to maintain certainty

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

Unresolved issues Intangibles Intangibles How to locate? How to locate? How to measure? How to measure?

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

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

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

Conclusion EU is moving in the right direction in company tax reform with a CCCTB and FA 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 EU MS may be able to reach a cooperative outcome