1. B2- Fiscal Policy Analysis: work programme and organisation
Joint Research Centre
the European Commission's in-house science service
Corporate Income Tax Reform
in the EU
B2- Fiscal Policy Analysis: work programme and organisation
Jonathan Pycroft
Co-authors:
María Teresa Álvarez-Martínez, Salvador Barrios, Maria Gesualdo, Dimitrios Pontikakis
Salvador Barrios JRC-B2 04 July 2016
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.

2. Overview Introduction to CORTAX: Corporate tax CGE Simulations
Harmonising EU CIT rates
Single country lowering CIT rates
Motivation
tax competition & tax avoidance
(EU Action Plan on Corporate Taxation)
large vs small economies
Overview

3. Overview of the Model CORTAX (CORporate TAXation)
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 and profit shifting to the tax haven
Governments tax corporate, labour, financial incomes. Revenues are transferred to the old generation
Overview of the Model CORTAX (CORporate TAXation)

4. The CORTAX model FIRMS Domestic Multinational headquarters
Tax revenue
Transfer
FIRMS
Domestic
Multinational headquarters
Multinational subsidiary
Tax haven
Profit shifting
Transfer pricing
Household OLG
( young, old )
Government
Budget balanced
L, K, F
W, Rk, Rf G
Asset, bond
Debt, equity
The CORTAX model

5. Simulation Design COORDINATED Harmonisation of CIT rates in the EU +
UNCOORDINATED
Unilateral reduction: CIT rate in Ireland
Unilateral reduction: CIT rate in Germany
Free vs fixed capital across the EU28
Simulation Design

6. Harmonised CIT rates
27.7%

7. Harmonised CIT rates
27.7%

8. Harmonised CIT rates + reduction in Ireland
27.7%

9. Harmonised CIT rates + reduction in Germany
27.7%

10. Comparing results profit shifting
Profit shifting from headquarters to subsidiaries
Harmonised
baseline
CIT reform IN
OUT
Euro millions
Percentage
Ireland
1185
8.98% -
Rest of EU
-1185
-0.17%
Germany
6055
4.65%
-6055
-1.03%
Comparing results profit shifting

11. Comparing results mobile capital from RoW
CIT rate
CoC K L
GDP
CIT revenue
Welfare pp %
% of GDP
Ireland
-10.0
-0.24
3.30
-0.19
1.64
-1.15
0.5
Rest of EU
0.00
-0.01
Germany
3.05
-0.34
0.88
0.2
-0.05
-0.02
Comparing results mobile capital from RoW

12. Comparing results fixed capital from RoW
CIT rate
CoC K L
GDP
CIT revenue
Welfare pp %
% of GDP
Ireland
-10.0
-0.25
3.26
-0.19
1.63
0.17
0.5
Rest of EU -
0.00
-0.04
-0.02
-0.01
Germany
2.42
-0.37
0.69
-1.15
0.08
0.05
-0.62
0.01
-0.09
Comparing results fixed capital from RoW

13. Conclusions Tax competition impacts other countries
Profit shifting
Capital iff competition for capital within EU
Country size matters
Larger gains for small countries
And smaller losses for others
Conclusions