The European Commission favours the introduction of a consolidated corporate tax base to overcome the distortions arising from the existing system of separate accounting. The blueprints for consolidation are simulated with the applied general equilibrium model CORTAX. We show that the benefits of a common consolidated tax base are limited due to two weaknesses. Formula apportionment, which is needed to allocate the consolidated taxable profits across jurisdictions, creates for MNEs new tax planning possibilities to exploit tax rate differentials in the European Union. In addition, it triggers tax competition as the incentives for member states to attract foreign investment by reducing their tax rates are enforced. The second weakness arises from the unlevel playing field, which is introduced if only part of the firms chooses to participate in the consolidation. The gains from consolidation can be fully grasped if it is obliged for all firms and accompanied by harmonisation of the tax rate.

Additional Metadata
Keywords European Union, applied general equilibrium model, consolidation, corporate tax, formula apportionment
JEL International Investment; Long-Term Capital Movements (jel F21), Efficiency; Optimal Taxation (jel H21), Business Taxes and Subsidies (jel H25), International Fiscal Issues; International Public Goods (jel H87)
Publisher Tinbergen Institute
Persistent URL
Series Tinbergen Institute Discussion Paper Series
Journal Discussion paper / Tinbergen Institute
van der Horst, A, Bettendorf, L.J.H, & Rojas-Romagosa, H. (2007). Will Corporate Tax Consolidation improve Efficiency in the EU ? (No. TI 2007-076/2). Discussion paper / Tinbergen Institute. Tinbergen Institute. Retrieved from