Politická ekonomie 2024, 72(1):73-101 | DOI: 10.18267/j.polek.1411

Novel Configuration of Formulary Apportionment Using the Correlated Random Effect Approach

Markéta Mlčúchová ORCID...
Faculty of Business and Economics, Mendel University in Brno, Czech Republic

This paper examines various configurations of the formula under the formulary apportionment methodology from the perspective of the explanatory power of the variability in profitability of multinational companies with the aim to identify the best-performing formula based on analytical evidence of panel microeconomic data. The considered configurations of the formula are based on the novel composition of the allocation formula indicated under the BEFIT proposal, preceding the CCCTB proposal, and traditionally used formulas, at the sub-national level, in Canada and the United States. The empirical analysis uses microeconomic panel data obtained from the Orbis database for 77,087 subsidiaries affiliated with 2,283 parent companies observed from 2011 to 2020. Utilising the correlated random effect approach, accounting for time-specific effects, including the time-constant explanatory variables such as economic activity, classified by NACE codes and the EU Member States' jurisdiction, this paper devises a novel formula configuration. Besides a novel configuration of the apportionment formula, consisting of sales, costs of employees, tangible and intangible assets, this paper estimates proportional weights of apportionment factors and concludes with policy recommendations.

Keywords: Corporate taxation, formulary apportionment, correlated random effect
JEL classification: C23, H25, K34

Received: June 14, 2023; Revised: August 18, 2023; Accepted: September 4, 2023; Prepublished online: February 12, 2024; Published: February 27, 2024  Show citation

ACS AIP APA ASA Harvard Chicago IEEE ISO690 MLA NLM Turabian Vancouver
Mlčúchová, M. (2024). Novel Configuration of Formulary Apportionment Using the Correlated Random Effect Approach. Politická ekonomie, 72(1), 73-101. doi: 10.18267/j.polek.1411
Download citation
  • BibTeX (.bib)
  • Bookends (.ris)
  • EasyBib (.ris)
  • EndNote (.enw)
  • EndNote 8 (.xml)
  • ISI WoS (.isi)
  • Medlars (.medlars)
  • Mendeley (.ris)
  • MODS (.xml)
  • Papers (.ris)
  • RefWorks (.txt)
  • RefManager (.ris)
  • RIS (.ris)
  • MS Word (.xml)
  • Zotero (.ris)
    • Open full article

    References

    1. Altshuler, R., Grubert, H. (2010). Formula Apportionment: Is It Better Than the Current System and Are There Better Alternatives? National Tax Journal, 63(4), 1145-1184. https://doi.org/10.17310/ntj.2010.4S.13 Go to original source...
    2. Anand, B. N., Sansing, R. (2000). The weighting game: Formula apportionment as an instrument of public policy. National Tax Journal, 53(2), 183-199. https://doi.org/10.17310/ntj.2000.2.01 Go to original source...
    3. Azémar, C., Corcos, G. (2009). Multinational firms' heterogeneity in tax responsiveness: The role of transfer pricing. The World Economy, 32(9), 1291-1318. https://doi.org/10.1111/j.1467-9701.2009.01210.x Go to original source...
    4. Baltagi, B. H. (2021). Econometric Analysis of Panel Data. 6th ed. Cham: Springer. ISBN 978-3-030-53952-8. Go to original source...
    5. Clausing, K. A., Lahav, Y. (2011). Corporate tax payments under formulary apportionment: Evidence from the financial reports of 50 major U.S. multinational firms. Journal of International Accounting, Auditing and Taxation, 20(2), 97-105. https://doi.org/10.1016/j.intaccaudtax.2011.06.004 Go to original source...
    6. Cobham, A., Janský, P. (2018). Global Distribution of Revenue Loss from Corporate Tax Avoidance: Re-estimation and Country Results. Journal of International Development, 30(2), 206-232, https://doi.org/10.1002/jid.3348 Go to original source...
    7. Corrado, C. A., Sichel, D. E., Hulten, C. R. (2009). Intangible Capital and U.S. Economic Growth. The Review of Income and Wealth, 55(3), 661-685. https://doi.org/10.1111/j.1475-4991.2009.00343.x Go to original source...
    8. Crivelli, E., de Mooij, R., Keen, M. (2016). Base Erosion, Profit Shifting and Developing Countries. FinanzArchiv / Public Finance Analysis, 72(3), 268-301. Go to original source...
    9. Dancaková, D. Sopko, J., Glova, J., et al. (2022). The Impact of Intangible Assets on the Market Value of Companies: Cross-Sector Evidence. Mathematics, 10(20), 3819. https://doi.org/10.3390/math10203819 Go to original source...
    10. Eberhartinger, E., Petutschnig, M. (2017). CCCTB: the employment factor game. European Journal of Law and Economics, 43(2), 333-358. https://doi.org/10.1007/s10657-015-9505-0 Go to original source...
    11. Edmiston, K. D. (2002). Strategic apportionment of the state corporate income tax - An applied general equilibrium analysis. National Tax Journal, 55(2), 239-262. https://doi.org/10.17310/ntj.2002.2.03 Go to original source...
    12. Edmiston, K. D., del Granado, F. J. A. (2006). Economic Effects of Apportionment Formula Changes Results from a Panel of Corporate Income Tax Returns. Public Finance Review, 34(5), 483-504. https://doi.org/10.1177/1091142106289016 Go to original source...
    13. Egger, P., Eggert, W., Winner, H. (2010). Saving taxes through foreign plant ownership. Journal of International Economics, 81(1), 99-108. https://doi.org/10.1016/j.jinteco.2009.12.004 Go to original source...
    14. Eichner, T., Runkel, M. (2008). Why the European Union Should Adopt Formula Apportionment with a Sales Factor. The Scandinavian Journal of Economics, 110(3), 567-589. https://doi.org/10.1111/j.1467-9442.2008.00551.x Go to original source...
    15. Fox, W. F., Murray, M. N., Luna, L. (2005). How should a subnational corporate income tax on multistate businesses be structured? National Tax Journal, 58(1), 139-159. https://doi.org/10.17310/ntj.2005.1.07 Go to original source...
    16. Fuest, C., Hemmelgarn, T., Ramb, F. (2007). How would the introduction of an EU-wide formula apportionment affect the distribution and size of the corporate tax base? An analysis based on German multinationals. International Tax and Public Finance, 14(5), 605-626. https://doi.org/10.1007/s10797-006-9008-6 Go to original source...
    17. Goolsbee, A., Maydew, E. L. (2000). Coveting thy neighbor's manufacturing: the dilemma of state income apportionment. Journal of Public Economics, 75(1), 125-143. https://doi.org/10.1016/S0047-2727(99)00036-5 Go to original source...
    18. Greene, W. H. (2018). Econometric analysis. 8th ed. London: Pearson. ISBN 978-0134461366.
    19. Hansson, Å., Olofsdotter, K. J., Thede, S. (2017). Do Swedish Multinationals Pay Less in Taxes than Domestic Firms? The World Economy, 41(2), 393-413. https://doi.org/10.1111/twec.12585 Go to original source...
    20. Hines, J. R. (2008). Income Misattribution under Formula Apportionment. European Economic Review, 54(1), 108-120. https://doi.org/10.1016/j.euroecorev.2009.08.011 Go to original source...
    21. Hulya, C., Hodžić, S. (2017). The Impact of Corporate Income Tax on R&D of Multinational Entities: An Impact Analysis of Separate Taxation and CCCTB. European Financial and Accounting Journal, 12(3), 17-31. https://doi.org/10.10.18267/j.efaj.185 Go to original source...
    22. Hundsdoerfer, J., Wagner, J. (2020). How accurately does the CCCTB apportionment formula allocate profits? An evaluation of the European Commission proposal. Journal of Business Economics, 90(4), 495-536. https://doi.org/10.1007/s11573-019-00962-1 Go to original source...
    23. Krchnivá, K., Nerudová, D. (2018). The CCCTB Allocation formula game: The Performance of Economic Sectors. Prague Economic Papers, 27(4), 427-448, https://doi.org/10.18267/j.pep.660 Go to original source...
    24. Llopis, E. L. (2017). Formulary Apportionment in the European Union. Intertax, 45(10), 631-641. Go to original source...
    25. Martins, A., Taborda, D. (2022). BEFIT and Formulary Apportionment: Should Intangibles Be Included in the Formula? EC Tax Review, 31(3), 131-139. Go to original source...
    26. Matheson, T., Beer, S., Coelho, M., et al. (2021). Formulary Apportionment in Theory and Practice. In: De Mooij, R., Klemm, A., Perry, V. Corporate Income Taxes under Pressure - Corporate Income Taxes under Pressure. Why Reform Is Needed and How It Could Be Designed, 283-252. Washington, D.C.: International Monetary Fund. ISBN 9781513511771.
    27. McLure, Jr. C. E. (1981). The Elusive Incidence of the Corporate Income Tax: The State Case. Public Finance Review, 9(4), 395-413. https://doi.org/10.1177/109114218100900402 Go to original source...
    28. McLure, Jr. C. E. (2000). Implementing State Corporate Income Taxes in the Digital Age. National Tax Journal, 53(4.3), 1287-1305. https://doi.org/10.17310/ntj.2000.4s2.02 Go to original source...
    29. Merriman, D. (2015). A Replication of Coveting Thy Neighbor's Manufacturing: The Dilemma of State Income Apportionment. Public Finance Review, 43(2), 185-205. https://doi.org/10.1177/1091142114537892 Go to original source...
    30. Mintz, J. (2008). Europe Slowly Lurches to a Common Consolidated Corporate Tax Base: Issues at Stake. In: Lang, M. et al. A Common Consolidated Corporate Tax Base for Europe, 128-138. Cham: Springer. ISBN 978-3-540-79483-7. Go to original source...
    31. Nerudová, D., Solilová, V., Litzman, M., et al. (2020). International tax planning within the structure of corporate entities owned by the shareholder-individuals through Panama Papers destinations. Development Policy Review, 38(1), 124-139. https://doi.org/10.1111/dpr.12403 Go to original source...
    32. Nerudová, D., Krchnivá, K. (2016). Tax sharing under the Common Consolidated Corporate Tax Base: Measurement of the profit generating factors in the agriculture sector. Agricultural Economics, 62(8), 363-377. https://doi.org/10.17221/222/2015-AGRICECON Go to original source...
    33. Nerudová, D., Solilová, V. (2015). The Impact of The CCCTB Introduction on The Distribution of The Group Tax Bases Across The EU: The Study for The Czech Republic. Prague Economic Papers, 24(6), 621-637. https://doi.org/10.18267/j.pep.514 Go to original source...
    34. Nerudová, D., Solilová, V. (2018). Mandatory CCCTB Implementation in the Eurozone and its Impact on Corporate Tax Revenues in the Czech Republic. Ekonomie a Management, 21(1), 4-23. https://doi.org/10.15240/tul/001/2018-1-001 Go to original source...
    35. Oestreicher, A., Koch, R. (2011). The Revenue Consequences of Using a Common Consolidated Corporate Tax Base to Determine Taxable Income in the EU Member States. Finanzarchiv, 67(1), 64-102. https://doi.org/10.1628/001522111X574191 Go to original source...
    36. Pirvu, D., Banica L., Hagiu, A. (2011). Implications of the common consolidated corporate tax base introduction on tax revenues (case study on Romania). Romanian Journal of Political Science, 11(1), 91-102.
    37. Roggeman, A., Verleyen, I., Van Cauwenberge, P., et al. (2013). The EU apportionment formula: Insights from a business case. Journal of Business Economics and Management, 14(2), 235-251. https://doi.org/10.3846/16111699.2011.638668 Go to original source...
    38. Roggeman, A., Verleyen, I., van Cauwenberge, P., et al. (2012). An empirical investigation into the design of an EU apportionment formula related to profit generating factors. Transformations in Business & Economics, 11(3), 36-56.
    39. Shackelford, D., Slemrod, J. (1998). The revenue consequences of using formula apportionment to calculate US and foreign-source income: A firm-level analysis. International Tax and Public Finance, 5(1), 41-59. https://doi.org/10.1023/A:1008664408465 Go to original source...
    40. Solilová, V., Nerudová, D. (2019). Transferové ceny: Unikátní komplexní zpracování problematiky. Praktické pojetí formou případových studií. Praha: Wolters Kluwer ČR. ISBN 978-80-7598-169-1.
    41. Swenson, C. W. (2015). The Cash Flow and Behavioral Effects of Switching to a Single Sales Factor on State Taxation. Journal of The American Taxation Association, 37(2), 75-107. https://doi.org/10.2308/atax-51203 Go to original source...
    42. Weiner, J. M. (2006). Company Tax Reform in The European Union: Guidance from The United States and Canada on Implementing Formulary Apportionment in the EU. Cham: Springer. ISBN 978-0-387-29424-7.
    43. Wooldridge, J. M. (2012). Introductory Econometrics: A Modern Approach. 5th ed. Boston: South-Western Cengage Learning. ISBN-13 978-1-111-53104-1.

    This is an open access article distributed under the terms of the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License (CC BY NC ND 4.0), which permits non-comercial use, distribution, and reproduction in any medium, provided the original publication is properly cited. No use, distribution or reproduction is permitted which does not comply with these terms.


    Return to the content