Cross-Border Loss Offset and Formulary Apportionment: How Do They Affect Multijurisdictional Firm Investment Spending and Interjurisdictional Tax Competition?
29 Pages Posted: 18 Aug 2003
Date Written: August 2003
Abstract
Motivated by the EU Commission's suggested company tax reforms, this paper investigates how cross-border loss offset and formulary apportionment of a consolidated tax base affect the investment and transfer pricing behaviour of a multijurisdictional firm, and how they affect the behaviour of governments potentially engaged in tax competition. The paper shows that cross-border loss offset mitigates both the reactions of a multijurisdictional firm to tax changes and the amount of tax competition engaged in by governments. However, formulary apportionment (with a consolidated tax base) boosts the sensitivity of firms to tax changes and increases the scope for interjurisdictional tax competition as well. For governments, formulary apportionment operates like a risk-sharing or partial equalisation mechanism.
Keywords: Cross Border Loss Offset, Multinational Firms, Tax Competition
JEL Classification: H31, H73, H87
Suggested Citation: Suggested Citation
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