Download Profit shifting

Joint Research Centre
the European Commission's in-house science service
*
Diego d'Andria
Salvador Barrios
JRC-B2
Co-authors:
04 July 2016
María Teresa Álvarez-Martínez, Salvador Barrios,
Jonathan Pycroft, Maria Gesualdo, Dimitrios Pontikakis
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.
*
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
*
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
*
FIRMS
• Domestic
• Multinational headquarters
Transfer
Profit shifting
Tax haven
pricing
• Multinational subsidiary
Debt, equity
Asset, bond
W, Rk, Rf
Household OLG
( young, old )
G
L, K, F
Tax revenue
Transfer
*
Tax revenue
Government
Budget (balanced)
*
Work in progress: Include knowledge
*
2 sectors: a final good, and an intermediate good ("knowledge")
Output
Value-added
Labour
*
*
Capital
Local factor
Labour
Knowledge
Capital
Local factor
Knowledge stock
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 ↓
*
*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)
*
*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
*
Country
CIT_rate
Allowance
Capital
Employm.
GDP
Welfare
AUT
BEL
DNK
FIN
FRA
DEU
GRC
HRV
IRL
ITA
LUX
NLD
PRT
ESP
SWE
GBR
CYP
CZE
EU-Average
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0.04
0.17
0.01
0.01
-0.15
0.02
0.01
0
0.13
0.01
0.04
0.05
0.01
0
0
0.04
-0.02
0.02
0
0.04
0.16
0.01
0.01
-0.16
0.02
0.01
0
0.05
0.01
0.02
0.03
0.01
-0.02
0
0.02
-0.02
0.01
-0.01
0.13
0.66
0.03
0.04
-0.23
0.06
0.04
0.02
0.55
0.05
0.03
0.14
0.08
-0.05
-0.07
0.22
-0.03
0.07
0.05
0.04
0.24
0.04
0.04
-0.25
0.02
0.01
0
0.24
0.02
-0.15
0.19
0.02
-0.04
-0.02
0.1
0.04
0.01
0.00
*
*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)
*
Country
AUT
BEL
DNK
FIN
FRA
DEU
GRC
HRV
IRL
ITA
LUX
NLD
PRT
ESP
SWE
GBR
CYP
CZE
EU
CIT_rate
Allowance
Capital
Employm.
GDP
Welfare
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
-0.01
0.02
-0.01
-0.01
0.04
0
0
-0.01
-0.06
0
-0.08
-0.03
0
0.01
0
-0.01
-0.01
-0.02
0
-0.01
0.02
-0.01
-0.01
0.05
0
0
-0.01
-0.02
0
-0.07
-0.02
0
0.02
0
-0.01
-0.01
-0.01
0
-0.07
0.03
-0.05
-0.06
0.17
0.01
-0.02
-0.07
-0.36
0
-0.03
-0.13
-0.02
0.07
0.02
-0.11
-0.17
-0.09
-0.01
-0.02
0.03
-0.04
-0.04
0.11
0
0
-0.02
-0.16
0
-0.13
-0.11
-0.01
0.04
-0.01
-0.08
-0.04
-0.03
0
*
*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
*
CIT_rate Allowance Capital Employm.
GDP
Welfare
Adjt elast. for intang.
EU
0
0
0
-0.01
0.05
0.00
Adjt elast. for intang. +
Profit shifting cost ↑
EU
0
0
0
0.00
-0.01
0.00
Deprec. rate for intang. ↓
EU -0.90
-2.19
-0.33
-0.05
-0.12
-0.02
Adjt elast. for intang. +
Deprec. rate for intang. ↓
EU -0.90
-2.19
-0.33
-0.05
-0.13
-0.01
*
INDEX
BASE
BASE (no change)
100.0
SIMU1
Adjust elasticity for intangible share
111.4
SIMU2
Adjust elasticity for intangible share +
Profit shifting cost ↑
SIMU3
Depreciation rate for intangibles ↓
101.6
Adjust elasticity for intangible share +
Depreciation rate for intangibles ↓
Adjust elasticity for intangible share +
Depreciation rate for intangibles ↓ +
Profit shifting cost ↑
112.6
SIMU4
SIMU5
*
56.2
57.9
* 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)
diego.d'[email protected]
*