2001), Tax spillovers under separate accounting and formula apportionment. EPRU Working Paper 2001-07

It is observed in the real world that taxes matter for location decisions and that multinationals shift pro…ts by transfer pricing. The US and Canada use Formula Apportionment (FA) to tax corporate income, and the EU is debating a switch from Separate Accounting (SA) to FA. This paper develops a theoretical model that compares basic properties of FA to SA. The focal point of the analysis is on how changes in tax rates a¤ect capital formation, input choice, and transfer pricing as well as spillovers on tax revenue in other countries. The analysis shows that a move from SA to FA will not eliminate such spillovers and will, in cases identi…ed in the paper, actually aggravate them. ¤We would like to thank participants in seminars at Adelaide, Mainz, Bergen, Copenhagen, and Stockholm. This paper was initiated while Schjelderup was visiting EPRU. The activities o