Reforming the Taxation of Multijurisdictional Enterprises in Europe

Abstract

In 2001, the European Commission proposed replacing the current system of taxation of multinational companies by the taxation of a consolidated base, computed at the level of all the European entities of a multinational enterprise, and then distributed for taxation purposes among the various jurisdictions in which these entities operate, according to pre-established criteria. In this article, we propose a discussion, especially focusing on two related issues, the choice of the formula and the composition of the consolidating area—either the entire European Union (EU) or some Member States within an Enhanced Cooperation Agreement—, as well as on their impact on the size and distribution of tax revenue and economic activity, and on the intensity of tax competition. Our tentative policy conclusion is that the reform deserves support provided that (i) the formula puts emphasis on criteria that the firm may not too easily manipulate, (ii) the activities of the multijurisdictional enterprise are enough mobile, (iii) the consolidation is made compulsory within the consolidating area and (iv) the consolidating area protects its capacity to actually levy tax by adopting a crediting system vis-a-vis the rest of the world. (JEL code: H32, H73, H87) Copyright , Oxford University Press.