Part 1 - AL-Tax

International Taxation Handbookthere is, up to now, very little research on whether these rules have had a significanteffect on reported profit.These international profit-shifting practices lead to a negative relationshipbetween reported profit and the tax burden, which is confirmed by multiple studies(Grubert and Mutti, 1991; Hines and Rice, 1994; Grubert and Slemrod, 1998;Bartelsman and Beetsma, 2003, among others). Interestingly, Grubert (1993) reportedthat the reactivity of reported profit to taxes has been unchanged despite the globalizationtrends in the 1980s. Profit shifting presumably leads to tax revenue lossesbecause of lower reported taxable income. At the same time, the economic literaturehas mentioned two mitigating effects. Mintz and Smart (2004) showed thatincome shifting may decrease the responsiveness of real investment to taxes. Inother words, because the tax burden can be decreased via profit shifting, companiesdo not feel so much pressure to relocate their activities and thus keep theirheadquarters and jobs in the high-tax country. The same idea is developed byGordon and MacKie-Mason (1995), for whom income shifting, both cross-border(through transfer pricing) and domestic (through the decision to incorporate ornot), softens the race to the bottom predicted by economic theory. The total neteffect is, however, certainly a decrease in tax revenues – as the last two effectsonly mitigate and do not reverse the tax minimization strategy – though its size isuncertain.8.7.4 How should the comprehensive solutions be implemented?Several implementation issues were discussed in the 2001 Communication.Here, we look at three that may have a significant impact on the design of a possiblecommon consolidated tax base. The first one refers to the scope of companiesto which the common tax base would apply. One question that arose was thereforewhether the new European Company Statute (Societas Europaea, SE) could serveas a pilot for the implementation of a new tax base. The SE is a long-awaited legalform available for companies that merge or create a holding or joint subsidiary. Itshould facilitate cross-border EU restructuring. However, it does not as yet containprovisions regarding taxation, other than national ones. Although the 2001 reportindicates that the SE could be a suitable vehicle for a pilot or test case, the mostrecent discussions have not taken up the issue further.A second point concerns the use of the International Financial ReportingStandards (IFRS, formerly International Accounting Standards, or IAS). The IASRegulation requires listed companies to prepare their consolidated accounts inaccordance with these standards from 2005 onwards (see European Commission,194