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The European Commission’s proposal to establish a Common Consolidated Corporate Tax Base reduces both compliance and administrative costs for European groups. The proposal would replace separate entity accounting with a profit allocation based on formula apportionment. Since formula apportionment rests on the source principle, the group faces an incentive to invest in low tax member states. Residence-based group taxation based on separate entity accounting could be an alternative. The subsidiaries’ profits and losses are attributed to the parent of the group (current inclusion), and the European group’s profit is taxed at the corporate income tax rate of the parent. The parent’s state of residence grants a foreign tax credit. Current inclusion prevents tax distortions regarding the location of investments, if no limitations on the foreign tax credit exist. A serious drawback of residence-based taxation is the incentive to move the group’s headquarter to a low tax member state. At present, this incentive is mitigated by exit taxation. Applicable exit taxation rules, however, most likely infringe upon European law. Rules that conform to European law probably abolish unfavourable liquidity effects upon exit. In net present value terms, however, exit taxes still render it burdensome for the group to move the headquarter to another member state.
