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Vox: Weighing the Pros and Cons of Corporate Tax Reform in the EU

Authors: Leon Bettendorf, Michael Devereux, Simon Loretz, and Albert van der Horst
March 20, 2012

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The European Commission has launched proposals to radically reform corporate income tax in the EU with a system known as the Common Consolidated Corporate Tax base. This column in Vox suggests that this reform would have significant effects on individual member states, but only small effects at the aggregate level in terms of employment, GDP and efficiency.

The European Commission (2011) has launched proposals to radically reform corporate income tax in the EU, with a system known as the Common Consolidated Corporate Tax base. The Commission aims to facilitate cross-border investment by multinational companies and to reduce cross-border profit shifting. Our research suggests that this reform would have significant effects on individual member states, but only small effects at the aggregate level.

Under the current tax regime, multinationals file separate accounts for each country in which they operate. Under the Consolidated Corporate Tax, each company would compute only its EU-wide consolidated profit, on a common definition of the tax base. This profit would be allocated to member states on the basis of an apportionment formula containing factors such as shares in employment, payroll, assets, and sales. Each member state would retain its autonomy to tax its allocated share of profits at its own tax rate.

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