Corporate tax systems and cross country profit shifting : formula apportionment vs. separate accounting

Abstract

This paper shows in a symmetric tax competition model that a formula apportionment system can attain the first best welfare optimum without any political pre-agreed harmonization or coordination of tax bases and tax rates. The same result cannot be obtained under separating accounting even if countries agree on both tax rates and bases. The efficiency of company tax reform therefore requires more political cohesion under separate accounting than formula apportionment and yields lower welfare.