Back Matter
  • 1 https://isni.org/isni/0000000404811396, International Monetary Fund

Appendix 1. Revenue Effects of FA by Economy

This appendix shows the revenue effects of FA for individual economies. It first presents results using our standard profit variable. Then, it explores the robustness of the results with the BEA data by using an alternative measure for taxable profits, based on CIT revenue.

Appendix Table 1.1 presents the change in CIT revenue collected from MNEs if there is global adoption of formula apportionment (in percentage change). The results are presented based on various apportionment factors and using three different datasets. For example, the ‘Employment’ column shows the change in total CIT revenue from MNEs, if the share of employees in each economy is used to allocate the consolidated profit of the MNE. Appendix Table 1.2 uses taxable income as the proxy for the tax base, rather than economic profit.

Appendix Table 1.1.

Revenue Effects of FA by Economy

(Percentage Change in CIT Revenue from MNEs)

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Appendix Table 1.2.

Revenue Effects of FA by Country; Using Taxable Income as the Proxy Tax Base

(Percentage Change in CIT Revenue)

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Note: Aggregate for BEA is calculated between 2014 – 2016 due to a break in the data

Appendix 2. Revenue Effects of FA using EBIT to Measure Taxable Profit

This appendix presents results on the revenue effects of FA, including from loss consolidation and from reallocation of tax base, using an alternative measure of pre-tax profit – earnings before interest and tax (EBIT). Comparing to pre-tax profit, the main advantage of using EBIT is that it excludes any income from equity investment in affiliates, should the company included in our analysis has any subsidiaries. For these companies, pre-tax profits measured by EBT would also include these passive incomes, thus introducing measurement noise in the taxable profit of the respective country. As EBIT is reported before reconciliation of any financial income, it does not double count income or loss from subsidiaries. On the other hand, interest income/payment are still part of EBIT, so EBIT may inflate the pre-tax profit with additional interest income or payment. For these considerations we do not use EBIT as the main measure of pre-tax profit with the ORBIS data, but instead assess the revenue effects of FA using EBIT as an alternative measure of taxable profit.

Effects on Global Tax Revenue

Impact of Loss Consolidation. To assess the impact of cross-border loss consolidation on the global tax base, we use the same approach as used in Section C. Namely, we start with the loss carry forward in 2011, based on the reported losses in 2010. In subsequent years, the stock of losses carried forward grows with new losses and shrinks with the losses that are offset against profits in that year. While the pattern of the stock of loss carryforward remains very similar (Appendix Figure 2.1), more losses are offset in the current year under EBIT, leading to a somewhat smaller global CIT base after loss consolidation. Specifically, for all companies that incurred some losses in 2011, the global CIT base under cross-border consolidation is estimated to be 14 percent smaller than under SA with loss carry forward in 2016. The extent of reduction is slightly larger than that based on EBT (10 percent).

Appendix Figure 2.1.
Appendix Figure 2.1.

Stock of Loss Carryforward, by Year of Initial Losses

Citation: IMF Working Papers 2019, 213; 10.5089/9781513516257.001.A999

Source: IMF staff estimates.

Incorporating the effect of reallocation. To determine the net global revenue effect of FA, we follow Section C and allocate the new global CIT tax base among countries, based on their respective share of fixed assets and employment. The relocation effect is quite similar under EBIT, boosting global CIT revenue by 3 percent if assets are used in the formula and by 5 percent if employment is used. In net, using EBIT as an alternative measure of taxable profit, global CIT tax revenue would decrease by 11 percent under the fixed asset formula, and by 9 percent under the employment formula. The size of reduction is slightly larger than the prior assessment, mainly due to a smaller global CIT base after loss consolidation using EBIT.

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1

We thank Vitor Gaspar, Cory Hillier, Michael Keen, Alexander Klemm, Peter Merrill, Tom Neubig, Victoria Perry and several IMF colleagues for excellent comments. We also benefited from useful discussions with Ray Mataloni from the Bureau of Economic Analysis. Outstanding research assistance was provided by Alice Park.

2

See Weiner (2005) for an assessment of FA systems in Canada and the U.S.

3

See European Commission (2016) for a description and impact assessment of the CCCTB.

4

Avi-Yonah and Clausing (2008) propose unilateral adoption of FA by the U.S., i.e. the U.S. tax base would be a fraction of the worldwide income of each MNE operating in the U.S., based on the share of worldwide sales. The focus in this paper is on international adoption.

5

Note that the data are based on the U.S. tax system before the tax cuts and jobs act of 2017. The analysis would probably yield different outcomes for the post-reform period.

6

Allocation to the country where users are based stems from the idea that users generate information that is of value to the business. Drawing a line between users and consumers as contributors to the business is inherently difficult, however, implying that sales by destination might be a reasonable factor to reflect allocation to user countries.

7

In the U.S., many states use throwback rules that attribute taxable income back to the source state if a company has no nexus in the State where the goods are sold.

8

A third effect would occur if the common tax base under FA is chosen to be different from the weighted average tax base of countries under the current system. Here, we assume that this is not the case.

9

Mardan and Stimmelmayr (2018) show that the revenue loss from loss consolidation might be more than offset in the longer term as MNEs re-optimize their strategies and governments their policies.

10

Another effect, not discussed here, is on risk taking. Under FA, cross-border loss offset implies that the CIT becomes a better insurance device, thereby encouraging risky investments (the Domar-Musgrave effect). Empirical evidence finds that limitations to loss offset indeed hurt investment and risk taking (Dressler and Overesch 2013).

11

This selection process differs from Cobham and Loretz (2014) who include all MNE subsidiaries in their sample. On average, companies selected in our sample are considerable larger in terms of turnover, fixed assets, and number of employees than in their analysis.

12

Table II.E 2 Goods and Services Supplied by Affiliates, Country by Destination

13

Table II.D 7 Sales by Affiliates to Unaffiliated Foreigners in Foreign Countries Other Than the Host Country, Country by Country of Destination. The most recent benchmark year is 2014; benchmark surveys are completed every 5 years.

14

While this is the most comprehensive measure of profit that is liable to tax in the financial statement, earnings before taxes does include income from equity investment and hence income from own affiliates, if any. Double counting of profits for those with affiliates would imply that total tax base when measured with earnings before tax is somewhat overestimated. To check the robustness of our analysis, we use “Operating Revenue and Losses” as an alternate profit indicator and report the results in Appendix 2.

15

Our calculations assume that group relief exists at neither the domestic nor the international level. As some countries do allow for domestic relief/loss consolidation, the tax base presented here likely presents an upper bound of true tax base under SA (and the difference with FA is likely to be smaller). For example, 18 of the 27 EU Member States provide a form of domestic group relief/consolidation. Only few countries allow for cross-border loss offsets.

16

Allocation factors will depend on country-specific macro-economic conditions, including cyclical conditions, and thus affect automatic stabilization of the CIT. However, the consolidated profit might be relatively more robust and less dependent on asymmetric shocks.

17

Due to the aggregate nature of the data, estimating the revenue effects of cross-border loss consolidation within company groups is not possible (as the data also offset losses between company groups).

18

The analysis ignores limitations in the period of loss carry forward, which are relevant in several countries. However, since the period explored here is only 5 years and almost all countries have periods exceeding this, the assumption of unlimited carry forward does not have implications for the results.

19

Country-specific effects are provided in Appendix 1. Revenue effects are presented in percentage change relative to current revenue. If the tax rate is the same under SA and FA, then the percentage increase/decrease in revenue is the same as the percentage increase/decrease in the tax base.

20

The revenue results are broadly similar if taxable income is used as the proxy for the tax base instead of profits, see Appendix A, Table A.2.

21

Based on 2017 CDIS and excluding resource-rich countries.

An Assessment of Global Formula Apportionment
Author: Ruud A. de Mooij, Ms. Li Liu, and Dinar Prihardini