ARTICLE IN PRESS

European Economic Review 54 (2010) 80–81

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European Economic Review

journal homepage: www.elsevier.com/locate/eer

Editorial

Introduction to the special section on multinational taxation and tax

competition

For most of the world’s developed economies, increasing economic integration has resulted in substantial gains in
income as well as increased pressures and challenges associated with greater competition for business investment. In 2001,
recognizing that most ‘‘[l]arge EU companies now view the whole EU as their ‘home market’ and accordingly seek to
establish effective pan-European business structures’’ (EC, 2001, p. 5), the European Commission sought to develop
coherent EU policies to promote ‘‘greater efficiency, effectiveness, simplicity and transparency in company tax systems and
remove the hiatuses between national systems which provide fertile ground for avoidance and abuse’’ (EC, 2001, p. 10). The
current economic crises have increased the pressure on nations to address the sources of abuse and ‘‘the need for
international tax cooperation and common standards y has become a regular feature of international discussions.’’ (EC,
2009) Two important areas of concern are tax planning strategies by multinationals and harmful tax competition.
To discuss these issues, a conference on ‘‘Multinational Taxation and Tax Competition’’ was held on June 5 and 6, 2008 in
Amsterdam, Netherlands sponsored by Elsevier, The Helen Kellogg Institute for International Studies at the University of
Notre Dame, and the Center for European Integration Studies at the University of Bonn. The conference brought together a
number of economists engaged in the study of how national and international policies influence multinational activity and
tax competition incentives. A subset of the papers presented, including both theoretical and empirical research, is
published as a special section of this issue. All the papers published in this special section were subject to the standard
review process.
The first three papers study how tax policy influences multinational behavior. Qing Hong and Michael Smart present a
theoretical model in which tax havens can have a positive effect on the welfare of non-haven countries by facilitating
complementarities in multinational investment. They show that the investment enhancing effects of tax planning, which
are facilitated by the existence of tax havens, can lead to an increase in effective and statutory rates for a high-tax country
and an increase in welfare for citizens of the high-tax country. Peter Egger, Wolfgang Eggert, Hannes Winner, and Christian
Keuschnigg find evidence of the use of debt to shift profits out of high-tax countries by comparing the debt to assets ratios
of domestic- and foreign-owned companies operating in Europe. They find that foreign-owned firms have higher debt to
assets ratios than domestic-owned firms and that this difference is increasing in the statutory tax rate of the host country.
By controlling for the endogeneity of domestic vs. foreign ownership, the authors show that previous studies have
underestimated the role of debt allocations in multinational tax planning. James Hines, Jr., studies whether apportionment
formulas can distort the merger/divestiture decisions of firms operating in different countries. Using European data, he
shows that wages and employment do a very poor job of explaining variation in multinational profit. Thus apportionment
formulas that use employment data, such as those most often mentioned in European Commission proposals such as EC
(2001, 2002), create the strongest merger/divestiture distortions.
The last three papers focus on tax competition issues. The papers by Søren Nielsen, Pascalis Raimondos-Møller and
Guttorm Schjelderup and by Thomas Gresik compare tax competition equilibria when countries apportion multinational
profit using transfer prices (separate accounting) versus using an apportionment formula. Nielsen et al. show that a shift
from separate accounting to formula apportionment as proposed in EC (2001) can actually exacerbate tax competition
pressures and result in lower equilibrium tax rates and lower equilibrium tax revenues. Gresik formally models the
information asymmetries between governments and multinationals that create the need to adopt a system for
apportioning multinational income to calculate national tax liabilities. In order for formula apportionment to generate
higher equilibrium tax revenues, the procedures available for auditing transfer prices must be sufficiently noisy. This paper
also shows that the difference in equilibrium tax revenues is non-monotonic in a multinational’s private efficiency
parameter. As a result, a shift to a formula apportionment system may generate previously unanticipated political economy

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Editorial / European Economic Review 54 (2010) 80–81 81

effects in terms of whether high and low efficiency firms are favored over intermediate efficiency firms. Finally, the paper
by Johannes Becker and Clemens Fuest studies the effect of a coordinated union transportation investment policy in a tax
competition model. Contrary to expressed concerns by national European leaders, coordinated transportation investments
mitigate tax competition incentives by lowering the cost of shipping goods across national boundaries. As such, this paper
supports arguments in favor of the EU leading coordinated investments in transportation infrastructure as opposed to
independent investments being made by individual countries.
Together the papers in this special section contribute to a more nuanced understanding of the role of multinationals in
the global economy. Current EU policies regarding the taxation of multinational companies are based upon a negative view
of tax havens and tax planning strategies, a belief in the efficacy of apportionment formulas in reducing tax distortions and
tax competition pressures, and the concern that union-wide infrastructure policies can promote harmful tax competition.
The papers in this special section suggest that these policies should be re-evaluated in light of new theoretical insights and
empirical evidence.

References

European Commission, 2001. Towards an internal market without tax obstacles: a strategy for providing companies with a consolidated corporate tax
base for their EU-wide activities. COM (2001) 582 final, Brussels.
European Commission, 2002. Company taxation in the internal market. COM(2001) 582 final, Brussels.
European Commission, 2009. Promoting good governance in tax matters. COM(2009) 201 final, Brussels.

Thomas A. Gresik 
University of Notre Dame, Notre Dame, IN 46556, United States
E-mail address: tgresik@nd.edu

Juergen von Hagen

University of Bonn, Bonn, Germany
Indiana University, Bloomington, IN, USA
CEPR, London, UK
29 July 2009; accepted 20 August 2009

 Corresponding author.