The Impact of Corporate Income Tax on R&amp;D of Multinational Entities: An Impact Analysis of Separate Taxation and CCCTB

Hulya Celebi,Sabina Hodžić

doi:10.18267/j.efaj.185

Abstract

The significant contribution of R&D to economic development and sustainability has been shown by various studies. Therefore, governments offer different fiscal instruments to attract R&D, especially regarding multinational entities (MNEs). One of the fiscal instruments are tax incentives for R&D. Furthermore, the EU has been working on the switch from Separate Taxation (ST) to Common Consolidated Corporate Tax Base (CCCTB) for longer than a decade, which will lead to harmonized R&D tax allowances, however without harmonizing the tax rates. Hence, this study aims at analyzing how ST and CCCTB impact the location of MNEs' R&D activities, tax burden and countries' tax revenue through a case study. The results show that, under ST, tax jurisdictions can stimulate MNEs' R&D activities by means of attractive tax allowances and lower tax rates. Especially for high-tax countries, the tax allowances represent an important tool for attracting R&D activities. However, under CCCTB, the location of R&D activities additionally depends on the Formula Apportionment (FA) factors of the tax base, where the countries cannot exert a direct influence. Hence, the reduction of tax rates remains the only tool left to Member States, which can lead to revenue loss on the whole. Furthermore, the FA of the tax base under CCCTB mitigates the impact of any dislocation of R&D to a low-tax country, which, under ST, leads to larger tax savings of MNEs and its impact on jurisdictions' tax revenue is greater.

Highlights

Changes in the economic environment, technology, globalization and business structures entail discussions about the appropriateness of the currently used source-based taxation principle of Separate Taxation (ST) in this changed environment
The formula for Formula Apportionment (FA) within the framework of the Common Consolidated Corporate Tax Base (CCCTB) is based on the Massachusetts formula, e.g. the tax base share of group member A is apportioned in relation to the sum of all the group members (Group) as shown in the following (European Commission, 2011): Share A =
Because the taxation is based on the allocation factors, half of the total tax base is taxed in Country A, even though it exhibits a lower tax base than the subsidiary in B

Summary

Introduction

Changes in the economic environment, technology, globalization and business structures entail discussions about the appropriateness of the currently used source-based taxation principle of ST in this changed environment (see e.g. IMF, 2014). – Hodžić, S.: The Impact of Corporate Income Tax on R&D of Multinational Entities: An Impact Analysis of Separate Taxation and CCCTB. The objective of this proposal is to solve the corporate income taxation dilemma within the EU, which negatively impacts investments within the EU and the growth of the Single Market. This covers issues such as higher compliance and administrative costs, double taxation, nontransparency regarding tax regulations with which the European MNEs are confronted. Tax competition across the Member States is another reason for this proposal, since the existence of 28 national corporate tax regulations within the EU disadvantages every Member State as well as the EU as a whole Tax competition across the Member States is another reason for this proposal, since the existence of 28 national corporate tax regulations within the EU disadvantages every Member State as well as the EU as a whole (see e.g. Devereux et al, 2002; Genschel et al, 2008; Eggert and Haufler, 2006; Eurostat, 2014; Huizinga and Laeven, 2008)

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Conclusion