Formula Apportionment: Factor Allocation and Tax Avoidance

Eichfelder S, Hechtner F, Hundsdoerfer J (2018)

Publication Language: English

Publication Type: Journal article

Publication year: 2018

Journal

European Accounting Review Taylor & Francis (Routledge)

Book Volume: 27

Pages Range: 649-681

Journal Issue: 4

DOI: 10.1080/09638180.2017.1364165

Abstract

This paper addresses the question of how firms react to tax incentives in a formula apportionment (FA) tax regime. Under FA, the profits of all consolidated entities of a business group are summed and then allocated according to a formula based on FA factors. We hypothesize that firms may change the allocation of real production factors and/or manipulate the FA factor through tax avoidance strategies. Analyzing FA tax effects of the German local business tax with payroll expense as the exclusive FA factor, we find empirical evidence consistent with both hypotheses. Regarding the allocation of production factors, we observe significant tax effects on labor input at the intensive margin but not on labor input at the extensive margin. In addition, we find evidence of an indirect FA spillover effect on capital investment. Our findings on tax avoidance proxies are consistent with tax-induced manipulations of payroll expense as an FA factor to save tax payments.

Authors with CRIS profile

Frank Hechtner

Involved external institutions

Freie Universität Berlin DE Germany (DE) Otto-von-Guericke-Universität Magdeburg DE Germany (DE)

How to cite

APA:

Eichfelder, S., Hechtner, F., & Hundsdoerfer, J. (2018). Formula Apportionment: Factor Allocation and Tax Avoidance. European Accounting Review, 27(4), 649-681. https://dx.doi.org/10.1080/09638180.2017.1364165

MLA:

Eichfelder, Sebastian, Frank Hechtner, and Jochen Hundsdoerfer. "Formula Apportionment: Factor Allocation and Tax Avoidance." European Accounting Review 27.4 (2018): 649-681.

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