Simultanious Investment and Financing Decisions of the Multinational Firm under a Common Consolidated Corporate Tax Base

The European Commission has been propagating the harmonization of company taxation in the EU through the introduction of a Common Consolidated Corporate Tax Base (CCCTB). The CCCTB would be allocated to all countries of residence of a multinational firm via an allocation formula. The concept is expected on the one hand to facilitate cross-border entrepreneurial activities; on the other hand to prevent cross-border profit shifting, which is a major problem under the current system. This paper analyzes the impact of this tax regime on entrepreneurial investment decisions, when the financing and investment decisions have to be taken simultaneously. The definition of the tax base is crucial for the achievement of the reform goal. An inadequate treatment of interest payments in the tax base will allow multinationals to shift profit also under a CCCTB.