1. B2- Fiscal Policy Analysis: work programme and organisation
Joint Research Centre
the European Commission's in-house science service
Intangibles & Profit Shifting:
An assessment of policy reforms
B2- Fiscal Policy Analysis: work programme and organisation
Diego d'Andria
Co-authors:
María Teresa Álvarez-Martínez, Salvador Barrios,
Jonathan Pycroft, Maria Gesualdo, Dimitrios Pontikakis
Salvador Barrios JRC-B2 04 July 2016
Disclaimer: The views expressed are purely those of the authors and may not in any circumstances be regarded as stating an official position of any affiliated institution.

2. Tax policy focus on knowledge economy (e. g
Tax policy focus on knowledge economy (e.g. EC Action 2003 "Investing in research")
Many intangible assets (patents, trademarks) come from innovative activity
Profit shifting found to be more likely with intangible assets (Grubert 2003, Dischinger and Riedel 2011, Beer and Loeprick 2015)
Extend CORTAX CGE model:
make profit shifting sensitive to share of intangible assets
simulate policy reforms to curb profit shifting
change tax treatment of intangible assets
Motivation

3. Overview of the Model CORTAX (CORporate TAXation)
CORTAX: Originally by CPB Netherlands (Bettendorf and van der Horst 2006)
Applied general equilibrium model: households, firms, government
Multi-country: EU28 + JPN + USA (+ tax haven)
Comparative static (steady state equilibria)
Calibrated on 2012 data (Eurostat, OECD, ORBIS, UN)
Overlapping generations (old, young); inter-temporal optimization
Labour/leisure optimization; workers immobile across countries
2 types of firm: DOMESTIC, MULTINATIONALS (HQ + SUBSIDIARIES)
Debt and equity financing; capital fully mobile across countries
Production of a single tradable final good
Multinationals perform transfer pricing between EU members + profit shifting to the tax haven
Governments tax corporate, labour, financial incomes. Revenues are transferred to the old generation
Overview of the Model CORTAX (CORporate TAXation)

4. The CORTAX model FIRMS Domestic Multinational headquarters
Tax revenue
Transfer
FIRMS
Domestic
Multinational headquarters
Multinational subsidiary
Tax haven
Profit shifting
Transfer pricing
Household OLG
( young, old )
Government
Budget (balanced)
L, K, F
W, Rk, Rf G
Asset, bond
Debt, equity
The CORTAX model

5. Roadmap future developments
Work in progress: Include knowledge
2 sectors: a final good, and an intermediate good ("knowledge")
Output
Local factor
Value-added
Labour
Capital
Knowledge
Capital
Labour
Knowledge stock
Local factor
Simulate tax incentives for R&D, IP boxes, effects of amortization schemes
Endogenous growth: Higher knowledge stock
 productivity ↑, knowledge spillovers  GDP ↑
However: Higher knowledge stock
 share of intangibles ↑  cost of profit shifting ↓
Roadmap future developments

6. Summary of simulations
Profit shifting ↔ intangibles
Adjust elasticities
Curbing profit shifting (anti-avoidance rules)
Profit shifting costs ↑
Changing depreciation rates for intangibles
as part of overall asset depreciation (similar to suggestions in BEPS actions 1 and 8)
Model closure: ex post on the labour tax (to keep total revenue neutrality), or ex ante on CIT rate (to maintain the original CIT revenues)
Summary of simulations

7. Base semi-elasticity of profit shifting = 1
Use ratio: intangible assets / total assets
Raise semi-elasticity if ratio above average,
lower if below average
Based on estimations in Beer and Loeprick (2015)
New range: 0.32 (CZE) to 2.31 (FRA)
EU average = 1
Elasticity is for multinational HQ (ownership)
Currently working on parameterisation
1. Adjust elasticities

8. 1. Simulations adjust elasticities for intangible share
Country
CIT_rate
Allowance
Capital
Employm.
GDP
Welfare
AUT
0.04
0.13
BEL
0.17
0.16
0.66
0.24
DNK
0.01
0.03
FIN
FRA
-0.15
-0.16
-0.23
-0.25
DEU
0.02
0.06
GRC
HRV
IRL
0.05
0.55
ITA
LUX
NLD
0.14
0.19
PRT
0.08
ESP
-0.02
-0.05
-0.04
SWE
-0.07
GBR
0.22
0.1
CYP
-0.03
CZE
0.07
EU-Average
-0.01
0.00
Countries with high shares (FRA, IRL) shift profits more easily from (FRA) or to (IRL) that country.
1. Simulations adjust elasticities for intangible share

9. profit shifting 2. Raise the cost of Profit shifting costs ↑
Policy proposals
Modelled by reducing elasticity of profit shifting
Start with intangible-adjusted values
If greater than 1  0.7
(compare controlled foreign corporation (CFC) rules)
Policy would be about transparency & sharing information; finding 'arm's length' equivalents
2. Raise the cost of
profit shifting

10. 2. Simulations raise cost of profit shifting
Country
CIT_rate
Allowance
Capital
Employm.
GDP
Welfare
AUT
-0.01
-0.07
-0.02
BEL
0.02
0.03
DNK
-0.05
-0.04
FIN
-0.06
FRA
0.04
0.05
0.17
0.11
DEU
0.01
GRC
HRV
IRL
-0.36
-0.16
ITA
LUX
-0.08
-0.03
-0.13
NLD
-0.11
PRT
ESP
0.07
SWE
GBR
CYP
-0.17
CZE
-0.09 EU
Countries with high shares (FRA) no longer lose profits as before.
2. Simulations raise cost of profit shifting

11. 3. lower depreciation rate for intangibles
Depreciation rates for intangibles ↓
Modelled by doubling the depreciation time for intangibles
i.e. broadening the CIT base
First, with base elasticities
Second, with adjusted elasticities
3. lower depreciation rate for intangibles

12. 3. Simulations lower depreciation rate for intangibles
CIT_rate
Allowance
Capital
Employm.
GDP
Welfare
Adjt elast. for intang. EU
-0.01
0.05
0.00
Adjt elast. for intang. +
Profit shifting cost ↑
Deprec. rate for intang. ↓
-0.90
-2.19
-0.33
-0.05
-0.12
-0.02
-0.13
Updated to new values 21jul16
3. Simulations lower depreciation rate for intangibles

13. Profit Shifting Index 100.0 111.4 56.2 101.6 112.6 57.9 INDEX
INDEX
BASE
BASE (no change)
100.0
SIMU1
Adjust elasticity for intangible share
111.4
SIMU2
Adjust elasticity for intangible share + Profit shifting cost ↑
56.2
SIMU3
Depreciation rate for intangibles ↓
101.6
SIMU4
Adjust elasticity for intangible share +
112.6
SIMU5
Depreciation rate for intangibles ↓ +
Profit shifting cost ↑
57.9
Profit Shifting Index

14. Conclusions Ongoing developments Raising the cost of profit shifting:
GDP neutral at EU level
Differential impact across countries
Effective in curbing profit shifting
Reducing depreciation allowance for intangibles:
Little impact on profit shifting
Small negative for GDP (with country variation)
Ongoing developments
Estimation of parameters
Separate knowledge sector
Innovation policy (tax incentives)
Currently a benefit of intangibles is the potential to increase profit shifting  curbing profit shifting, reduces attractiveness of intangibles
Holistic solution: introduce measures to reduce profit shifting and incentivise (openly) intangibles as governments wish.
Conclusions