Corporate income taxation of multinationals in a general equilibrium model

This paper contributes to the discussion on Separate Accounting versus Formula Apportionment in the corporate income taxation of multinational enterprises. The innovation is that we consider a general equilibrium tax competition model with an endogenous interest rate. In contrast to previous studies, we show that tax rates are inefficiently low not only under Separate Accounting, but also under Formula Apportionment. Moreover, we identify a wide range of empirically relevant cases where Formula Apportionment is superior to Separate Accounting, independent of the magnitude of the concealment cost of profit shifting. The reason for the change in results is that one country's tax rate affects other countries additionally via changes in the interest rate.

Research Highlights
► Compares Separate Accounting and Formula Apportionment in general equilibrium model.
► Shows that tax rates are inefficiently low under both tax principles.
► Shows that Formula Apportionment is superior independent of concealment cost.