## tmnieea

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---

### Executive Summary — objectives and scope
- Aim: contribute to European policy debate on CIT reform by:
  - Reviewing performance of the corporate income tax (CIT) in Europe and the role of multinational enterprises (MNEs).
  - Analyzing corporate tax spillovers in Europe, focusing on channels and magnitudes of profit shifting and CIT competition.
  - Examining progress in European CIT coordination and discussing reforms to strengthen harmonization to reduce tax competition and profit shifting.

### Executive Summary — key findings and magnitudes
- Statutory CIT rates:
  - Declined from an average of 35 percent in 1995 to 21 percent by 2019.
  - Current difference between maximum and minimum statutory CIT rates in Europe is about 17.5 percentage points.
  - Examples: France plans to reduce its CIT to 25 percent by 2022; United Kingdom lowered the tax rate from 28 percent to 19 percent since 2010; some Swiss cantons combined CIT rates down to almost 12.5 percent.
- CIT revenue role:
  - CIT revenue averaged about 3 percent of GDP during this period.
  - CIT revenue accounts for about 10 percent of tax revenue collection in Europe.
  - CIT revenue in 2018 averaged about 3 percent of GDP and was above 4 percent of GDP in one-third of the countries.
- Profit shifting and MNEs:
  - Empirical evidence suggests MNEs’ profits tend to be taxed less than profits of domestic peers.
  - Evolving MNE business models rely increasingly on complex global supply chains and intragroup trade in services and intangible assets.
- Global profit-shifting revenue loss estimates: in the range of USD 240 and 600 billion (as reported).
- COVID-19 fiscal context:
  - Estimated average fiscal costs of tax deferral and relief measures were 6.2 and 3.1 percent of GDP in advanced and emerging Europe, respectively.
  - Public debt ratios in many economies are rapidly rising toward 100 percent or already exceeding this level.

### Statutory CIT rates, revenue productivity, and MNE footprint
- CIT revenue productivity:
  - Defined as ratio of CIT revenue scaled by GDP to the statutory CIT rate; in Europe averages 14 percent.
- Decomposition components summarized: CIT Revenue / (CIT Rate x GDP) etc., with CGOS used as proxy for corporate profits.
- MNEs and FDI:
  - Foreign-owned enterprises contribute about 20 percent of value added in the EU and about 15 percent of employment, on average.
  - More than 40 percent of profits of nonfinancial corporates in Hungary and Ireland originate from affiliates of MNEs; more than 20 percent in Luxemburg, Poland, and the United Kingdom (selected examples).
  - There are 142 European multinationals among the 500 largest companies worldwide.
  - European MNEs' global 2017 totals: employed 18.5 million people worldwide; generated revenues of USD 8 trillion; generated profits of USD 490 billion.
- Special purpose entities (SPEs):
  - Out of USD 40 trillion of global FDI in 2017, approximately USD 15 trillion went into SPE-type structures; of this approximately USD 15 trillion, approximately USD 6 trillion are located in Luxemburg and the Netherlands and USD 1 trillion in Ireland and Switzerland.

### Spillovers, scale, and urgency
- Types of spillovers:
  - Base spillovers: impacts on real investment (FDI) and profit shifting.
  - Strategic spillovers: tax competition and cross-country policy responses.
- Empirical magnitudes:
  - Macro studies report global net revenue losses from profit shifting ranging from 5.1 to 23 percent of current CIT revenue (examples cited).
  - New estimates based on Beer, de Mooij, and Liu (2020a): global revenue losses due to profit shifting of about 5.1 percent of corporate tax revenue for 2016.
  - Selected micro-study transfer mispricing revenue-foregone estimates (percent of CIT revenue): Denmark 3.2; France 1.0; Germany 2.0; United Kingdom 0.4; United States 0.7.
- Tax competition elasticities:
  - A 1 percentage point reduction in the average CIT tax rate in all other countries induces a country to reduce its own rate by between 0.35 and 0.75 percentage point (empirical finding cited).

### Channels of corporate tax spillovers and profit shifting
- Main channels:
  - Abusive transfer pricing (mispricing intragroup trade in goods, services, intangibles).
  - Location and relocation of intellectual property (IP).
  - Intragroup lending (debt shifting).
  - Exploiting mismatches (hybrid instruments and entity classification differences).
  - Treaty shopping and routing through networks.
- Preferential regimes and IP boxes:
  - Preferential regimes target IP income; BEPS “nexus test” (since 2015) requires substantial activity for preferential treatment.
  - Preferential regimes can be used for profit shifting but may interact with general rate competition in complex ways.

### Policy responses to date
- International/G20-OECD BEPS project (2015): 15 action items addressing BEPS practices; includes minimum standards and common approaches (CFCs, interest limitation, countering harmful preferential regimes, transfer pricing alignment, etc.).
- EU measures: ATAD I and ATAD II; Directives on Administrative Co-operation and Dispute Resolution; historical directives include Merger Directive, Parent-Subsidiary Directive, Interest and Royalty Directive.
- ECJ rulings and state aid cases have constrained some national measures and produced legal tensions (examples cited in the source).

### Assessment of reform options — minimum taxation
- Objectives and expected effects:
  - Reduce intensity of tax competition and profit shifting; set a floor under CIT revenues; provide residence countries a backstop to outward profit shifting.
  - Reduce pressure on FDI-receiving countries to set tax rates below the minimum.
- Design variants:
  - Residence-based minimum on outbound investment (example: GILTI in the United States, 2017): applicable above a 10 percent deemed return on tangible assets located abroad; minimum tax rate set at 10.5 percent; US liability wholly eliminated through crediting if foreign tax exceeds 13.125 percent.
  - Source-based minimum on inbound investment (example: BEAT in the United States, 2017).
- Quantitative estimates preserved:
  - Devereux and others (2020): a global effective minimum tax rate of 10 percent, imposed on a country-by-country basis with no carve-outs, would generate additional revenue of about USD 32 billion globally (USD 32 billion equals 14 percent of the taxes paid by foreign affiliates of MNEs and 1.7 percent of worldwide CIT revenue).
  - OECD estimates (12.5 percent minimum rate and a carve-out of 10 percent on payroll and depreciation): additional gains by 0.8 to 1.1 percent of global CIT revenues from lowering profit shifting; total gain impact reaching 1.7 to 2.8 percent of global CIT revenues.
  - Clausing (2020): the GILTI minimum tax lowers the US affiliate CIT base in low-tax jurisdictions by about 12 to 16 percent.

### Assessment of reform options — CCCTB (CCTB + consolidation and apportionment)
- Design specifics (2016 proposal):
  - CCTB: single EU-wide set of rules for computing tax base; mandatory for large multinational groups with global sales of at least EUR 750 million; includes notional return on equity deduction and super-deduction for R&D; anti-avoidance measures and cross-border loss relief.
  - CCCTB: full consolidation and formula apportionment with four equally weighted factors: labor (employees and payroll), assets (tangible fixed assets), sales (destination-based), and a data factor (collection/use of personal data); sectoral adjustments for financial, oil and gas, and international transportation.
- Expected effects:
  - Greatly reduces scope for profit shifting via transfer pricing.
  - Reallocates tax base from low-tax countries toward high-tax countries.
  - EC impact assessment: investment boosted by 3.4 percent; GDP would rise by 1.2 percent.
  - Short-term aggregate revenue effect likely positive but small; dynamic effects and reduced tax competition could enhance revenue in the longer term.
- Distributional implications and political economy:
  - Large heterogeneous country-level tax base changes expected; some studies predict losses for Benelux and Ireland and gains for larger/high-tax countries; potential need for compensation mechanisms.
  - Stepwise implementation options: apply formula apportionment to above-normal profits only; residual profit allocation schemes.

### Interaction and complementarities
- CCCTB combined with a minimum tax would further mitigate tax competition and strategic spillovers.
- CCCTB with sales-by-destination or a data factor reduces incentives for unilateral digital services taxes but does not allocate taxing rights in the same way as destination-based profit taxes.
- Destination-based profit taxes (DBCFT) discussed as alternative architectures: economically efficient, border-adjusted, but raise WTO and legal questions and generate large country-level distributional effects.

### Policy implications and recommendations (preserved emphasis)
- Deeper coordination of CIT policies in Europe is needed to reduce tax competition and profit shifting effectively.
- Regional European reforms can be an important step toward a global solution in the absence of immediate global consensus.
- Two complementary regional reforms highlighted as feasible and effective:
  - Implement an effective minimum tax across Europe.
  - Implement a CCCTB with formula apportionment across EU Member States, potentially phased in to build consensus (for example, applying formula apportionment to above-normal profits first).
- Trade-offs and implementation notes:
  - Design sensitivity: higher minimum rates and smaller carve-outs increase effectiveness.
  - CCCTB may require compensating measures for countries that lose significant revenue; partial implementations (e.g., residual profit allocation) could be a politically feasible first step.

*Source: Executive Summary, tmnieea.*

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### Executive Summary

### Key objectives of the paper
- The paper aims to contribute to the European policy debate on CIT reform in three ways:
  - Review the performance of the corporate income tax (CIT) in Europe over the past several decades and the role of multinational enterprises (MNEs) in European economies.
  - Analyze corporate tax spillovers in Europe with a focus on the channels and magnitudes of both profit shifting and CIT competition.
  - Examine progress in European CIT coordination and discuss reforms to strengthen harmonization of corporate tax policies to reduce both tax competition and profit shifting.

### Main findings on CIT performance and MNEs
- Statutory CIT rates in Europe have declined from an average of 35 percent in 1995 to 21 percent by 2019.
- Despite declining statutory rates, the CIT has remained an important revenue source:
  - CIT revenue averaged about 3 percent of GDP during this period.
  - CIT revenue accounts for about 10 percent of tax revenue collection in Europe.
  - CIT revenue in 2018 averaged about 3 percent of GDP and was above 4 percent of GDP in one-third of the countries.
- Empirical evidence suggests MNEs’ profits tend to be taxed less than profits of domestic peers, reflecting profit shifting from high- to low-tax affiliates.
- Evolving MNE business models rely increasingly on complex global supply chains and intragroup trade in services and intangible assets, challenging the assumption that corporate activities and profit sources can be easily separated by national borders.
- Expansion of cross-border digital activities raises questions about basing taxing rights on the physical presence of the producer.

### Spillovers, scale, and urgency
- Cross-border profit shifting and tax competition generate international spillovers that undermine corporate tax bases and fairness.
- Existing studies estimate global profit-shifting revenue losses in the range of USD 240 and 600 billion.
- The COVID-19 pandemic increased the salience of CIT spillovers:
  - Estimated average fiscal costs of tax deferral and relief measures were 6.2 and 3.1 percent of GDP in advanced and emerging Europe, respectively.
  - Public debt ratios in many economies are rapidly rising toward 100 percent or already exceeding this level.
- The current difference between the maximum and the minimum statutory CIT rates in Europe is about 17.5 percentage points.
- Examples of recent domestic rate changes and levels cited:
  - France plans to reduce its CIT to 25 percent by 2022.
  - United Kingdom lowered the tax rate from 28 percent to 19 percent since 2010.
  - Some Swiss cantons have combined CIT rates down to almost 12.5 percent.

### Channels of corporate tax spillovers in Europe
- Profit shifting: a wide variety of tax planning devices shift taxable MNE income from high- to low-tax jurisdictions; micro approaches yield a wide range of estimates, while macro approaches find generally larger effects with sizable gains and losses across countries.
- Tax competition: strong tax competition in Europe has been a major driver of the steep decline in CIT rates and is reflected in the proliferation of preferential tax regimes for income from intellectual property (IP boxes).
- Existing reforms (e.g., G20-OECD BEPS project) addressed some profit-shifting problems but did not resolve pervasive tax competition or the allocation of taxing rights among countries.

### Assessment of reform options and expected effects
- Effective minimum taxation of MNEs:
  - Would reduce the intensity of tax competition and profit shifting and set a floor under CIT revenues.
  - Would reduce pressure on FDI-receiving countries to set tax rates below the minimum.
  - Would provide residence countries with a backstop to outward profit shifting.
  - Revenue effects can be significant, depending on the level of the minimum rate and the scope of application.
- Common Consolidated Corporate Tax Base (CCCTB):
  - Full CCCTB implementation would consolidate EU-wide MNE profits and apportion profits to individual countries using a formula that includes production factors and sales by destination.
  - CCCTB would greatly reduce scope for profit shifting in Europe but would still leave room for tax competition to attract mobile production factors; including sales in the apportionment formula would mute this effect.
  - Joint implementation of CCCTB with a minimum tax would further mitigate strategic spillovers.
  - EU-wide revenue effects of CCCTB, particularly if it included cross-border loss relief and new deductions for equity and R&D expenses as presently proposed, would likely be small initially but grow over time.
  - Given the significant effects on relative CIT revenues of individual countries, a stepwise implementation (for example, applying formula apportionment to above-normal profits only as a first step) may be needed to gain agreement among all EU Member States.

### Policy implications and recommendations
- Deeper coordination of CIT policies in Europe is needed to effectively reduce tax competition and profit shifting.
- Regional European reforms can serve as an important step toward a global solution in the absence of immediate global consensus.
- Two complementary regional reforms are highlighted as feasible and effective:
  - Implementing an effective minimum tax across Europe.
  - Implementing a CCCTB with formula apportionment across EU Member States, potentially phased in to build consensus.
- The paper argues that these reforms—individually and jointly—constitute real progress in reducing CIT spillovers and that it is time for action.

*Source: Executive Summary, tmnieea.*

### 1. Statutory CIT Rates

### 1. Statutory CIT Rates

### CIT revenue performance and productivity
- CIT revenue performance varies across European countries due to tax competition, profit shifting, variation in degree of incorporation, economic structure (for example, natural resource rents or large multinationals), and taxpayer behavior.
- CIT revenue productivity is defined as the ratio of CIT revenue scaled by GDP to the statutory CIT rate and "gives an indication of how much revenue is raised by each percentage point of the CIT rate."
- In Europe, CIT revenue productivity averages 14 percent.
- The ratio of CIT revenue-to-CGOS is, in almost all countries, well below their statutory CIT rates, reducing CIT productivity and reflecting policy choices regarding the corporate tax base.

### Decomposition of CIT productivity (as presented)
- The document presents the following decomposition (with CGOS = corporate gross operating surplus):
  - CIT Revenue
    __
    CIT Rate x GDP
      5
  - 1
    _
    CIT Rate
      3
    CIT Revenue
      _
      CIT Base
        3
    CIT Base
      _
      CGOS
        3
    CGOS
      _
      GDP

- CGOS is used as a proxy for corporate profits and "measures the return on corporate investment before tax, depreciation, and interest deductions."

### Statutory vs effective tax measures
- There is a negative association between countries’ statutory CIT rates and the share of profits in GDP, which reflects tax competition and profit shifting.
- Policy choices beyond the statutory tax rate can be measured by the average effective tax rate (AETR).
- AETRs are lower than statutory tax rates in most countries.
- Effective tax rate computation assumptions (OECD database, as reported):
  - Sources of finance are debt and equity with corresponding shares of 35 and 36 percent, respectively.
  - Effective rates are the unweighted average of asset-specific effective rates computed for four asset categories: nonresidential structures, tangible assets, intangible assets, and inventories.
  - The pretax rate of return is set to 20 percent.
- The marginal effective tax rate measures the tax on returns from an investment that just breaks even.

### MNEs and Foreign Direct Investment in Europe
- Foreign-owned enterprises contribute about 20 percent of the value added generated in the EU.
- Foreign-owned enterprises contribute about 15 percent of employment, on average.
- More than 40 percent of profits of nonfinancial corporates in Hungary and Ireland originate from affiliates of MNEs; more than 20 percent in Luxemburg, Poland, and the United Kingdom (selected examples).
- There are 142 European multinationals among the 500 largest companies worldwide.
- European MNEs' global 2017 totals:
  - Employed 18.5 million people worldwide.
  - Generated revenues of USD 8 trillion.
  - Generated profits of USD 490 billion.
- European MNEs have largest global presence in revenue terms in the financial sector (including banking and insurance) and in the energy and motor vehicle industries; relatively low presence in the technology sector.

### Special purpose entities (SPEs) and FDI composition
- A significant share of FDI in Luxembourg and the Netherlands is dominated by “transit” flows by special purpose entities (SPEs), which typically have minimal physical production or employment and carry out holding activities, intrafirm financing, or manage intangible assets.
- Damgaard, Elkjaer, and Johannesen (2019) estimate:
  - Out of 40 trillion of global FDI in 2017, approximately 15 trillion went into this type of corporate structure (SPEs).
  - Of this approximately 15 trillion, approximately 6 trillion are located in Luxemburg and the Netherlands and 1 trillion in Ireland and Switzerland.
- FDI by SPEs (particularly in Luxemburg, the Netherlands, and Switzerland) declined significantly in 2018, following the 2017 US corporate tax reform.

### Cross-border digital trade and tax allocation
- Global digital trade grew from 19.3 trillion in 2012 to 27.7 trillion in 2016 (US International Trade Commission).
- The increase in cross-border digital trade has intensified debate about allocating taxing rights to destination countries where consumers or users are based, rather than solely to jurisdictions with a physical presence (“permanent establishment”).

### Evidence on tax effects on FDI and profit reporting
- Empirical evidence suggests MNE profits tend to be taxed less than profits of domestic peers:
  - Bilicka (2019): multinational affiliates report lower profits than comparable domestic companies in the United Kingdom.
  - Egger, Eggert, and Winner (2010): similar finding in high tax European countries.
  - At the consolidated group level, MNEs tend to report relatively high after-tax profits, reflecting tax optimization to shift profits from high- to low-tax affiliates.
- De Mooij and Ederveen (2008) meta-analysis: a 10 percentage point reduction in a country’s average effective tax rate increases its stock of FDI, on average and in the long term, by more than 30 percent.

### Corporate tax spillovers: definitions and channels
- "Spillover" refers to the impact that one jurisdiction’s corporate tax policy has on the economic wellbeing of other jurisdictions.
- Two distinct types of cross-border spillovers:
  - Base spillovers: impact of one country’s tax policy on the tax bases of other countries, including:
    - (1) Impacts on real investment (FDI).
    - (2) Profit shifting.
  - Strategic spillovers: (topic introduced; further development appears later in the chapter).
- The size of spillovers depends on country size; large countries’ tax choices (for example Germany or France) can significantly affect other countries' tax bases.

*tmnieea - 1. Statutory CIT Rates — https://www.imf.org/-/media/files/publications/dp/2021/english/tmnieea.pdf*

### 2. Impact on profit location: Multinationals use various tax planning devices

### 2. Impact on profit location: Multinationals use various tax planning devices

### Profit shifting and interactions with real investment
- Multinationals shift taxable income from high- to low-tax jurisdictions using various tax planning devices.
- Country size matters much less for profit shifting than for real investment; the CIT rate of a small island economy can matter to the United Kingdom (and other large countries)—possibly as much or even more than the rate in Germany or France.
- Base spillovers through real investment and profit shifting are interdependent:
  - Profit shifting opportunities may blunt the impact of taxes on real investment and thus mitigate real distortions in allocation.
  - Profit shifting might also require firms to install some capital in a location to justify shifting profits there.
- Klemm and Liu (2019) provide a conceptual framework for these interactions.

### Strategic spillovers and tax competition
- Strategic spillovers reflect how a country’s policy choices respond to tax changes abroad (tax competition).
- International tax competition leads to inefficiently low tax rates and suboptimal global welfare outcomes (Keen and Konrad 2013).
- Empirical evidence on statutory CIT rate competition:
  - A 1 percentage point reduction in the average CIT tax rate in all other countries is found to induce a country to reduce its own rate by between 0.35 and 0.75 percentage point.
- Evidence on tax competition using marginal effective tax rates is less clear-cut (Leibrecht and Hochgatterer 2012).

### Empirical evidence on profit shifting in Europe
- Micro-data studies (transfer mispricing and related-party pricing):
  - Cristea and Nguyen (2016): Danish multinationals reduce unit values of exports to affiliates in low-tax countries by between 5.7 and 9.1 percent.
  - Micro-based estimates suggest revenue losses from transfer mispricing between 0.5 and 3 percent of CIT revenue in selected European countries and the United States, though these studies may not capture all forms of profit shifting or interactions among channels.
- Meta- and macro-based estimates (semi-elasticity of the CIT base with respect to CIT rate differentials):
  - Beer, de Mooij, and Liu (2019) report a semi-elasticity of 1.5 (a 1 percentage point increase in the CIT rate relative to other countries reduces reported taxable profits by 1.5 percent).
  - Heckemeyer and Overesch (2017) produce an average “consensus” semi-elasticity estimate of 0.8.
  - Beer, de Mooij, and Liu (2020a) obtain a semi-elasticity of 1.0 and find the elasticity is rising over time; they conclude a semi-elasticity of 1.5 best reflects the current value.
- Macro studies report sizable global net revenue losses from profit shifting, ranging from 5.1 to 23 percent of current CIT revenue (examples):
  - Clausing (2016): average semi-elasticity of US MNE affiliate profits with respect to the effective tax rate of 2.9.
  - Tørsløv, Wier, and Zucman (2018): report a global CIT revenue loss of about 10 percent and suggest that fully eliminating profit shifting would increase reported profits by about 15 percent in high-tax EU countries.
- New estimates based on Beer, de Mooij, and Liu (2020a) point to global revenue losses due to profit shifting of about 5.1 percent of corporate tax revenue for 2016.
- Selected micro-study estimates of revenue foregone from transfer mispricing (Table 1):
  - Denmark (Cristea and Nguyen 2016): 3.2 (percent of CIT revenue)
  - France (Davies and others 2018): 1.0
  - Germany (Hebous and Johannessen 2021): 2.0
  - United Kingdom (Liu Schmidt-Eisenlohr, and Guo 2020): 0.4
  - United States (Flaaen 2018): 0.7

### Tax competition in Europe: trends and effects
- Average statutory CIT trends:
  - The average CIT rate in Europe was about 35 percent in 1995 and has declined to 21 percent today.
- Spatial patterns of tax competition are supported by estimates of tax reaction functions (Revelli 2005).
- Illustrative revenue effect:
  - If the EU27 countries plus Norway, Switzerland, and the United Kingdom had applied their 1990 CIT rates to their 2018 CIT bases, they would have collected 1.6 percent of GDP more revenues (note: this does not account for base changes).
- Preferential regimes and IP boxes:
  - Preferential regimes in Europe focus on lowering tax rates on income from IP (patents and trademarks).
  - Evidence that output-based IP regimes stimulate domestic R&D is mixed; direct incentives like tax credits and subsidies may be more effective (IMF 2016a).
  - IP regimes have been used by firms for profit shifting by relocating IP management.
  - Since 2015, BEPS minimum standards require preferential regimes to meet a “nexus test” requiring substantial activity by the taxpayer for the preferential treatment to apply.
- Whether preferential regimes are more or less harmful than cuts in the general CIT rate is controversial:
  - Preferential regimes targeting more mobile parts of the tax base can dampen tax competition in the general CIT rate.
  - Repeal of preferential regimes could imply a lower overall tax rate and lower revenues if tax competition shifts toward the general rate.
  - The EU allowance of preferential regimes for IP income may relax pressures on general CIT rates.

### Common profit-shifting channels (categories of strategies)
- Abusive transfer pricing: difficulties applying the arm’s length principle for firm-specific intangibles and services; empirical evidence on mispricing intragroup trade.
- Location of intellectual property (IP): transfers of IP rights to low-tax jurisdictions early in development; transfers of mature IP to claim capital allowances on market value at transfer.
  - Empirical literature documents a significant negative relationship between effective taxation of income from IP and firm intangible assets, including patents (Alstadsæter and others 2018; Griffith, Miller, and O’Connell 2014).
- Intragroup lending (debt shifting): intracompany borrowing to deduct interest expenses in relatively high-tax jurisdictions while earning interest income in low-tax jurisdictions (IMF 2016b; Feld, Heckemeyer, and Overesch 2013; Hebous and Ruf 2017).
- Exploiting mismatches: tax arbitrage from different countries classifying the same entity, transaction, or instrument differently (Harris 2014).
- Treaty shopping: exploiting tax treaty networks to route income to reduce taxes (Weichenrieder and Mintz 2010; Van’t Riet and Lejour 2018).
  - Within the EU, withholding taxes are largely abolished on intra-EU payments under the Interest and Royalties Directive and the Parent-Subsidiary Directive; a concern remains about differences across Member States in tax treatments of outbound payments to non-EU countries.

### International and EU policy responses
- G20-OECD BEPS project (2015): 15 action items to identify and address practices that contribute to base erosion and profit shifting, including minimum standards and common approaches.
  - Actions address controlled foreign corporations, interest limitation, countering harmful preferential regimes (nexus approach), preventing treaty abuse, aligning transfer pricing with value creation for intangibles, mandatory disclosure rules, and addressing tax challenges of the digital economy.
- EU-level coordination and directives:
  - Historical directives facilitating cross-border activity include the Merger Directive (90/434/EEC last amended in Council Directive 2005/19/EC), the Parent-Subsidiary Directive (Council Directive 2003/123/EC), and the Interest and Royalty Directive (Council Directive 2003/49/EC).
  - Recent EU measures guided by BEPS: Anti-Tax Avoidance Directives ATAD I and ATAD II (adopted in 2016 and 2017), making certain BEPS outcomes mandatory for Member States (for example, limiting interest deductibility and introducing exit taxes).
  - Directives to implement BEPS recommendations in EU law include Directives on Administrative Co-operation and the Dispute Resolution Mechanism Directive.
- Need for deeper coordination within the EU:
  - To mitigate profit shifting and tax competition within the EU, deeper coordination of corporate tax policies among Member States is necessary given the EU objective of fully integrated goods, labor, and capital markets.
  - Several EU initiatives aim to further coordinate European corporate tax policies; these received renewed momentum with the European Commission package for fair and simple taxation launched in July 2020 (EC 2020).

*Source: tmnieea - 2. Impact on profit location: Multinationals use various tax planning devices (IMF staff compilation in the provided PDF).*

### 1.  Interest limitation ruleYe sAn earning-stripping rule that addresses profit shifting using intra-company loans by

### tmnieea - 1.  Interest limitation ruleYe sAn earning-stripping rule that addresses profit shifting using intra-company loans by

### Anti-avoidance measures summarized
- Interest limitation rule
  - Denies the deduction of interest expenses if the ratio of net interest payments to Earnings before interest, tax, depreciation and amortization (EBITDA) exceeds 30 percent.
- Controlled foreign company (CFC) rule
  - CFC rules attribute passive income of a non-resident controlled entity, if some conditions are met, to the parent company (that is, to be deemed as taxable income in the resident country).
- Hybrid mismatches rule
  - Counters tax planning that exploits differences in countries’ legal characterizations of an entity or a financial instrument (for example, leading to double deduction). The ATAD originally addressed arrangements within the EU, but it was extended in March 2017 to coverage arrangements between EU Member States and non-member sates.
- General anti-avoidance rule (GAAR)
  - A provision of last resort that empowers the tax authority to counter schemes or transactions that undermine the intention of the tax law to avoid taxes, despite being formally compliant with the tax law.
- Exit taxation
  - Member States shall apply an exit tax on the excess of the market value of the transferred assets over their tax value, to prevent companies from avoiding tax in the State of origin by moving their tax residence or closing a permanent establishment. This tax serves as a safeguard against base erosion rather than a source of revenues.

### EU tax coordination: key developments and tensions
- ECJ case law has:
  - Banned tax practices that violate core EU principles (for example, freedom of establishment), prompting elimination of some national tax barriers but also constraining certain anti-avoidance measures such as CFC rules or denials of interest deductions.
  - Led to high-profile state aid cases (Apple, Starbucks, Fiat) challenging permitted tax planning.
- Digital taxation debate
  - European Commission 2018 proposal: (1) a desirable long-term solution to tax profits of highly digitalized businesses operating in a territory without physical presence; (2) an interim 3 percent tax on gross income of large digitalized businesses with a global turnover exceeding a certain threshold. No agreement reached to date.
- Historical and recent attempts at CIT rate harmonization:
  - 1963 Neumark Committee proposed a minimum tax of 50 percent on retained earnings.
  - 1975 European Commission proposed harmonized corporate tax rate between 45 and 55 percent.
  - 1992 Ruding Committee proposed bandwidth between 30 and 40 percent.
  - No minimum CIT rate agreement reached.

### Minimum effective taxation: designs and effects
- Two broad designs discussed:
  - Minimum tax on outbound investment (residence-based minimum)
    - Example: global intangible low-taxed income (GILTI) introduced in the United States in 2017.
    - GILTI features:
      - Applicable above a 10 percent deemed return on tangible assets located abroad.
      - Minimum tax rate is set at 10.5 percent (if no tax is paid abroad).
      - US liability wholly eliminated through crediting if the foreign tax on that income exceeds 13.125 percent.
  - Minimum tax on inbound foreign investment (source-based minimum)
    - Example: base erosion and anti-abuse tax (BEAT) introduced in 2017 in the United States.
- Potential strategic effects
  - Minimum taxes on outbound investment reduce incentives for aggressive tax competition and profit shifting.
  - International coordination reduces relocation incentives and adverse spillovers from unilateral adoption.
- Trade-offs by scope of adoption
  - Unilateral adoption: reduces domestic profit shifting but can deter headquarters location and inbound investment.
  - European adoption: reduces profit shifting out of the region and limits incentives for capital-importing countries to undercut rates.
  - Adoption by all important capital exporters: would fundamentally change tax competition and remove incentive to reduce rates below minimum.
- Design sensitivity
  - Higher minimum rates and smaller carve-outs increase effectiveness; lower minimum rates or larger carve-outs reduce benefits.

### Quantitative estimates of revenue and base effects (preserved values)
- Devereux and others (2020) simulation:
  - A global effective minimum tax rate of 10 percent, imposed on a country-by-country basis with no carve-outs, would generate additional revenue of about USD 32 billion globally.
  - USD 32 billion equals 14 percent of the taxes paid by foreign affiliates of MNEs and 1.7 percent of worldwide CIT revenue.
- OECD estimates (assuming a 12.5 percent minimum tax rate and a carve-out of 10 percent on payroll and deprecation of tangible assets):
  - Additional gains by 0.8 to 1.1 percent of global CIT revenues from lowering profit shifting.
  - Total gain impact reaching 1.7 to 2.8 percent of global CIT revenues.
- Clausing (2020) estimate:
  - The minimum tax on outbound investment (GILTI) in the 2017 US reform lowers the US affiliate CIT base in low-tax jurisdictions by about 12 to 16 percent.

### Corporate Income Tax Base Harmonization: CCCTB proposal specifics
- Two-step approach in the CCCTB proposal (2016):
  - Common Corporate Tax Base (CCTB)
    - Single EU-wide set of rules for computing the tax base.
    - Mandatory for large multinational groups with global sales of at least EUR 750 million; other companies may opt in voluntarily.
    - Includes a tax deduction for a notional return on equity (to mitigate debt bias) and a super-deduction for R&D expenditure (to stimulate innovation).
    - Foresees anti-avoidance measures including those from ATAD I and II and allows cross-border loss relief.
  - Common Consolidated Corporate Tax Base (CCCTB)
    - Full consolidation of EU-wide profits and formula apportionment.
    - Group’s consolidated profit shared between Member States using an apportionment formula; each Member State applies its own CIT rate to the apportioned share.
    - Apportionment formula comprises four equally weighted factors:
      1. Labor, based in equal measure on the number of employees and payroll costs.
      2. Assets (tangible fixed assets, whether owned, rented, or leased).
      3. Sales (other than intra-group sales) of goods and services net after discounts, returns, VAT, and other taxes and duties; sales factor is calculated based on destination.
      4. A data factor that reflects the collection and use of personal data of online platforms and services users.
    - Sectoral adjustments proposed for financial, oil and gas, and international transportation sectors.
- Advantages and limitations
  - Advantages:
    - Avoids conceptual and practical difficulties of the arm’s length principle.
    - Allocates tax base using proxies for substantial economic activities (payroll, assets, sales), aligning taxation closely with production factors and consumers.
    - Greatly reduces scope for profit shifting via transfer pricing.
  - Limitations and potential new distortions:
    - Firms may exploit mergers or ownership structures to shift returns to low-tax jurisdictions.
    - As the CIT under formula apportionment taxes factors in the formula, differences in rates can still induce distortions in the allocation of mobile assets and labor.
    - Sales-by-destination reduces some incentives for profit shifting but is not immune to avoidance (for example, channeling sales through low-margin unrelated firms).
    - CCCTB does not eliminate tax competition; factor-weight choices affect intensity of competition.
- Interaction with minimum taxation
  - Introduction of CCCTB together with effective minimum taxation would further mitigate tax competition.

*Source: Compiled by IMF staff.*

### 1. The common base under the CCTB is broader than the current aggregate

### 1. The common base under the CCTB is broader than the current aggregate tax base of countries

### Key findings on base breadth and consolidation
- The common base under the CCTB is broader than the current aggregate tax base of countries. The EC (2016) estimates that this broadens the aggregate tax base in the EU by 3 percent.
- Cross-border consolidation permits immediate offset of losses in certain affiliates against profits of affiliates in other countries, which will reduce the aggregate EU-wide tax base (although loss consolidation will also eliminate an important distortion to investment, which can partly offset this adverse revenue effect).
- As the CCCTB eliminates profit shifting, it will likely reallocate the tax base from low-tax countries toward high-tax countries, raising overall revenue for a given overall base.

### Dynamic effects and simulated economic impacts
- The CCCTB induces positive dynamic effects on economic activity and tax revenue through measures such as:
  - notional deduction for equity,
  - super deduction for R&D, and
  - cross-border loss relief.
- The EC impact assessment using a computable general equilibrium model for the EU finds:
  - investment would be boosted by 3.4 percent;
  - GDP would rise by 1.2 percent.
- The impact assessment concludes that the short-term aggregate revenue effect of the CCCTB will likely be positive but small; reduced incentives for tax competition due to the sales factor in the apportionment formula could enhance corporate tax revenue in the longer term.

### Distributional implications across countries
- Studies on formula apportionment find large and heterogeneous country-level tax base changes:
  - Fuest, Hemmelgarn, and Ramb (2007): small European countries such as Ireland and the Netherlands would lose part of their tax base, while large countries such as Germany, Italy, and France would benefit.
  - Devereux and Loretz (2008): Belgium, Denmark, Finland, Germany, Italy, and Luxembourg would see a reduction in tax revenues, while Spain, Sweden, and some Central and Eastern European countries would experience an increase.
  - De Mooij, Liu, and Prihardini (2019): using US-based MNE data and the CCCTB formula (including sales-by-destination) suggests significant gains for larger EU countries and those in Southern and Eastern Europe; major losses for the Benelux countries and Ireland. Their study finds formula apportionment benefits countries with higher tax rates and lower revenues in low-tax countries.
- The CCCTB may induce large changes in tax revenue of individual countries, creating a significant barrier to unanimous agreement among Member States.

### Partial and alternative approaches
- Given difficulties achieving unanimous CCCTB agreement, more limited approaches might be considered as first steps, for example:
  - residual profit allocation schemes that split MNE income into a “routine” return (taxed where production occurs) and a “residual” return (allocated by formula, e.g., sales by destination, and taxed at prevailing rates).
- Residual profit allocation aims to avoid taxation-at-source problems (distortions in capital allocation and tax competition) but can still have significant revenue implications for individual countries.

### Interaction with digital tax measures and minimum taxation
- Base harmonization reforms can reduce the role of unilateral taxes on digital services in Europe when the allocation formula includes sales by destination or a data factor, creating new taxing rights in destination countries for digital activities.
- A minimum tax does not allocate taxing rights by destination but lowers the tax advantage of low-tax locations, thereby reducing incentives to avoid taxable presence in destination countries.

### Related institutional and legal context (EU frameworks)
- The Code of Conduct on Business Taxation (CoCBT) addresses “harmful tax measures” and sets criteria for assessing such measures largely in the spirit of Action 5 of the G20-OECD BEPS project.
- In December 2017 the CoCBT Group adopted the first EU list of non-cooperative tax jurisdictions for tax purposes based on three criteria; as of October 2020 the list contains 12 jurisdictions.
- EU state aid rules under Article 107 of the Treaty on the Functioning of the European Union can apply when tax measures confer selective economic advantages; examples of EC state aid decisions mentioned include Starbucks in the Netherlands (2015), Amazon in Luxembourg (2017), and Apple in Ireland (2016). Subsequent EU General Court decisions in September 2019 and July 2020 annulled the EC’s decisions concerning Starbucks (EUR 30 million) and Apple (EUR 13 billion), respectively.

### Alternative tax architectures: destination-based profit taxes
- Destination-based profit taxes (border-adjusted) would exempt exports and not deduct imports, removing transfer-pricing motives and significantly reducing tax competition because taxes are determined by destination of sales.
- The Destination-Based Cash-Flow Tax (DBCFT) is a well-studied implementation that is economically efficient (neutral to investment and financing choices) and likely to have low compliance and administrative costs; a disadvantage is the likely large amount of refunds due to exporters.
- If adopted unilaterally or regionally, destination-based taxes could produce severe repercussions for non-participating jurisdictions, potentially increasing tax-competition pressure and prompting adoption by others; there are also legal doubts about WTO compliance.
- Replacing current CIT with a DBCFT at the same rate could leave global revenues similar but cause significant country-level gains or losses and increase revenue volatility and reduce automatic stabilization properties (due to deductibility of investment).

### Conclusions and policy implications
- Corporate income tax (CIT) reform in Europe is urgent given revenue needs after the COVID pandemic and ongoing profit shifting and tax competition that reduce revenues and create distortions.
- International cooperation, preferably global, is the first-best solution, but deeper coordination among EU member states on tax rate and base is necessary in the meantime.
- Key policy directions highlighted:
  - Implementation of the CCCTB would greatly reduce scope for profit shifting and could yield positive EU-wide growth and revenue effects, especially when dynamic effects on investment, corporate finance, and innovation are included.
  - The CCCTB may produce large country-level revenue changes benefiting high-tax countries and harming investment hubs; combining the CCCTB with a minimum tax could allow raising low CIT rates and expand revenues in low-tax countries.
  - Paving the way for CCCTB implementation may require compensating measures for countries that lose significant revenue and considering more limited formula apportionment approaches (e.g., residual profit allocation) as intermediate steps.

*tmnieea - 1. The common base under the CCTB is broader than the current aggregate tax base of countries*

### Conclusions

### Conclusions

### Key referenced topics and themes
- “Patent Boxes Design, Patents Location, and Local R&D.”
- “Destination-Based Cash Flow Taxation.”
- “International Tax Planning Under the Destination-Based Cash Flow Tax.”
- “Allocating Business Profits for Tax Purposes: A Proposal to Adopt a Formulary Profit Split Revenue.”
- “The Macroeconomics of Border Taxes.”
- “How Should Capital Be Taxed?”
- “Why is there Corporate Taxation? The Role of Limited Liability Revisited.”
- “Transfer Pricing Policy and the Intensity of Tax Rate Competition.”
- “International Corporate Tax Avoidance: A Review of the Channels, Magnitudes, and Blind Spots.”
- “Exploring Residual Profit Allocation.”
- “Comparing UK Tax Returns of Foreign Multinationals to Matched Domestic Firms.”
- “Cash Flow Taxes in an Open Economy.”
- “Exchange Rate Implications of Border Tax Adjustment Neutrality.”
- “The Effects of Profit Shifting on the Corporate Tax Base in the United States and Beyond.”
- “Profit Shifting Before and After the Tax Cuts and Jobs Act.”
- “Global Distribution of Revenue Loss from Corporate Tax Avoidance: Re-estimation and Country Results.”
- “Transfer Pricing by Multinational Firms: New Evidence from Foreign Firm Ownerships.”
- “Base Erosion, Profit Shifting and Developing Countries.”
- “What Is Real and What Is Not in the Global FDI Network?”
- “Knocking on Tax Haven’s Door: Multinational Firms and Transfer Pricing.”
- “At a Cost: The Real Effects of Transfer Pricing Regulations.”
- “Corporate Tax Elasticities: A Reader’s Guide to Empirical Findings.”
- “Corporate Income Taxes Under Pressure: Why Reform Is Needed and How It Can Be Designed.”
- “Corporate Tax Policy and Incorporation in the EU.”
- “International Taxation and Luxembourg’s Economy.”
- “An Assessment of Global Formula Apportionment.”
- “The OECD Global Anti-Base Erosion (GloBE) Proposal.”
- “The Effects of EU Formula Apportionment on Corporate Tax Revenues.”
- “Evaluating Tax Policy for Location Decisions.”
- “Corporate Income Tax Reforms and International Tax Competition.”
- “Residual Profit Allocation by Income.”
- “Evaluation of Federal Tax Incentives for Private R&D in Belgium: An Update.”
- “Saving Taxes through Foreign Plant Ownership.”
- “Commission Staff Working Document Impact Assessment Accompanying the Document Proposals for a Council Directive on a Common Corporate Tax Base and a Common Consolidated Corporate Tax Base (CCCTB).”
- “Action Plan for Fair and Simple Taxation Supporting the Recovery.”
- “FDI and Taxation: A Meta‐Study.”
- “Capital Structure Choice and Company Taxation: A Meta-Study.”
- “The Role of Transfer Prices in Profit Shifting by U.S. Multinationals: Evidence from the 2004 Homeland Investment Act.”
- “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.”
- “An Examination of Multijurisdictional Corporate Income Taxation under Formula Apportionment.”
- “Ownership of Intellectual Property and Corporate Taxation.”
- “A Destination-Based Cash Flow Tax Can Be Structured to Comply with World Trade Organization Rules.”
- “Neutralizing Effects of Hybrid Mismatch Arrangements.”
- “Global Firms, National Corporate Taxes: An Evolution of Incompatibility?”
- “Has Tax Competition Become Less Harmful?”
- “At Your Service! The Role of Tax Havens in International Trade with Services.”
- “Revenue Implications of Destination-Based Cash-Flow Taxation.”
- “Multinationals’ Profit Response to Tax Differentials: Effect Size and Shifting Channels.”
- “Spillovers in International Corporate Taxation.”
- “Fiscal Policies for Innovation and Growth.”
- “Tax Policy, Leverage and Macroeconomic Stability.”
- “A Review of Capital Taxation in France.”
- “Growth-Enhancing Corporate Tax Reform in Belgium.”
- “Capital Income Tax Reform Options in Denmark.”
- “Taxation of Corporations in Switzerland.”
- “The Impact of International Tax Reforms on Ireland.”
- “Corporate Taxation in the Global Economy.”
- “Germany: Tax Pressures and Reform Options.”
- “Preferential Regimes Can Make Tax Competition Less Harmful.”
- “The Theory of International Tax Competition and Coordination.”
- “The Impact of Profit Shifting on Economic Activity and Tax Competition.”
- “Comparing UK Tax Returns of Foreign Multinationals to Matched Domestic Firms.” (duplicate listing retained as in source)
- “Tax Challenges Arising from Digitalisation – Report on Pillar One Blueprint.”
- “Tax Challenges Arising from Digitalisation – Report on Pillar Two Blueprint.”
- “Harmful Tax Practices - 2017 Progress Report on Preferential Regimes.”
- “Corporate Income Tax Harmonization in the European Union.”
- “On Spatial Public Finance Empirics.”
- “Substitution Across Methods of Profit Shifting.”
- “Destination-Based Income Taxation and WTO Law: A Note.”
- “The Missing Profits of Nations.”
- “Optimal Tax Routing: Network Analysis of FDI Diversion.”
- “The Indirect Side of Direct Investment: Multinational Company Finance and Taxation.”

### Observations implicit in the references
- The referenced literature covers empirical, theoretical, and policy analysis on corporate taxation, profit shifting, transfer pricing, formula apportionment, destination-based taxation, tax competition, tax havens, digitalization of taxation, and country-specific corporate tax reform experiences.
- Multiple works examine effects of tax design on R&D, FDI, corporate location decisions, and revenue implications.
- International coordination proposals and OECD initiatives (Pillar One, Pillar Two, GloBE) are represented among cited works.

*tmnieea - Conclusions (references list from the provided PDF)*

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_Source: https://www.imf.org/-/media/files/publications/dp/2021/english/tmnieea.pdf_