Rethinking corporate taxation in the European Union: how and where to tax Multinational Enterprises

In this paper we conduct an empirical analysis to assess the redistributional impact of implementing a Formulary Apportionment approach in the European Union, compared to the current system based on the separate entity approach, aiming to contribute with databased evidence to the ongoing sensitive political debate about the much-needed change in the international (and, specifically, European) corporate tax regime. We update and extend prior research to estimate which Member States will likely gain and lose in terms of corporate tax base and revenues from the implementation of the ‘Business in Europe: Framework for Income Taxation’ (BEFIT) initiative, planned to be soon launched by the European Commission. Using recently published Country-by-Country Reporting data released by the Internal Revenue Service, our findings show that the redistributional impact among Member States would be significant. Results are in line with international tax literature: larger economies with higher tax rates (such as Germany and France) would experience a considerable tax base increase, transferred from smaller countries with lower tax rates (like the Netherlands and Ireland), as multinational enterprises would have more restricted opportunities to engage in artificial profit shifting activities.