CORTAX 2019 updated calibration and baseline results

Bratta, Barbara; Pycroft, Jonathan; Stoehlker, Daniel Working Paper CORTAX 2019 updated calibration and baseline results JRC Working Papers on Taxation and Structural Reforms, No. 07/2023 Provided in Cooperation with: Joint Research Centre (JRC), European Commission Suggested Citation: Bratta, Barbara; Pycroft, Jonathan; Stoehlker, Daniel (2023) : CORTAX 2019 updated calibration and baseline results, JRC Working Papers on Taxation and Structural Reforms, No. 07/2023, European Commission, Joint Research Centre (JRC), Seville This Version is available at: https://hdl.handle.net/10419/280875 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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Stoehlker, D. 2023 This publication is a working paper by the Joint Research Centre (JRC), the European Commission’s science and knowledge service. It aims to provide evidence-based scientific support to the European policymaking process. The contents of this publication do not necessarily reflect the position or opinion of the European Commission. Neither the European Commission nor any person acting on behalf of the Commission is responsible for the use that might be made of this publication. For information on the methodology and quality underlying the data used in this publication for which the source is neither Eurostat nor other Commission services, users should contact the referenced source. 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XX-XX-XX-XXX-XX-C i Contents Contents ........................................................................................................................................................................................................................................................................ i Abstract ....................................................................................................................................................................................................................................................................... 1 1 Introduction..................................................................................................................................................................................................................................................... 2 2 Structure of CORTAX .............................................................................................................................................................................................................................. 3 2.1 Households ........................................................................................................................................................................................................................................ 3 2.2 Firms and production ............................................................................................................................................................................................................... 3 2.3 Profit shifting: between countries and to the tax haven ....................................................................................................................... 4 2.4 Compliance Costs ........................................................................................................................................................................................................................ 4 2.5 Corporate Investment and FDI........................................................................................................................................................................................ 4 2.6 Cost of capital ................................................................................................................................................................................................................................ 4 2.7 Losses and loss carry forward ........................................................................................................................................................................................ 5 2.8 Public Sector ..................................................................................................................................................................................................................................... 5 2.9 Equilibrium ......................................................................................................................................................................................................................................... 5 3 Calibration of CORTAX .......................................................................................................................................................................................................................... 6 3.1 Data .......................................................................................................................................................................................................................................................... 6 3.1.1 Labour force statistics.......................................................................................................................................................................................... 6 3.1.2 FDI Stock Data ............................................................................................................................................................................................................. 6 3.1.3 Tax Revenue Data (Other Than Corporate Income Tax) ....................................................................................................... 7 3.1.4 Corporate Income Tax Regime ..................................................................................................................................................................... 7 3.1.5 CIT-related Tax Compliance Costs ............................................................................................................................................................ 9 3.1.6 Government Cost of Tax Collection ......................................................................................................................................................... 9 3.1.7 Corporate Taxation under Formulary Apportionment ......................................................................................................... 10 3.1.7.1 Tangible and Intangible Capital .................................................................................................................................................. 10 3.1.7.2 Sales by Destination Country ........................................................................................................................................................ 10 3.1.8 Corporate tax revenue to GDP ................................................................................................................................................................... 10 3.2 Parameters ..................................................................................................................................................................................................................................... 10 3.2.1 Model Equation Parameters ........................................................................................................................................................................ 11 3.2.2 Long-Run Data Estimates .............................................................................................................................................................................. 11 3.2.3 Production Parameters ..................................................................................................................................................................................... 12 3.2.4 Profit Shifting Parameters ............................................................................................................................................................................ 12 4 Baseline Characteristics of the 2019 Calibration ................................................................................................................................................... 14 4.1 Financial Distortions .............................................................................................................................................................................................................. 14 4.2 Investment Distortions ........................................................................................................................................................................................................ 14 4.3 Transfer Pricing Distortions ............................................................................................................................................................................................ 15 4.4 Profit shifting to tax havens .......................................................................................................................................................................................... 16 5 Conclusions and outlook ................................................................................................................................................................................................................. 18 References ............................................................................................................................................................................................................................................................. 19 List of abbreviations and definitions ........................................................................................................................................................................................... 21 ii List of figures ..................................................................................................................................................................................................................................................... 22 List of tables ........................................................................................................................................................................................................................................................ 23 1 Abstract CORTAX is a macroeconomic model that focuses on corporate taxation and is used extensively for European Commission policy assessments. As a macroeconomic model, it simulates variables such as GDP, investment and employment, while being especially notable for its focus on corporate income taxation (CIT). It models the key aspects of CIT, such as multinational profit shifting, investment decisions, loss compensation, and debtequity financing. CORTAX is versatile and can be used to examine different aspects of CIT, such as adjusting or harmonizing the CIT rate or base, addressing debt bias in CIT, and consolidation of the multinational CIT base. CORTAX is a multi-country model, covering all EU Member States, selected partner countries, and a tax haven. The general equilibrium framework of the model captures the interactions between different economic actors, including those between multinational headquarters and foreign subsidiaries. This calibration updates the model to 2019. This paper outlines the model structure, and explains the methodology used to arrive at the new baseline, including explaining the choices of data sources and parameters. The paper provides key summary results that serve as both a description and a validation of the model, and also serves as a reference for future work carried out using CORTAX 2019. 2 1 Introduction Corporate taxation is both an important source of government revenue and a significant factor shaping corporate behaviour, including investment and financing decisions. Furthermore, the complexity of corporate tax systems and the ability of multinational corporations to shift profits to low-tax jurisdictions have raised concerns about fairness, sustainability, and the erosion of the tax base. Certain forms of tax planning can be considered unfair, in the sense that they shift the tax burden onto other taxpayers. The issue of economic efficiency arises as companies may shift productive resources due to their corporate tax obligations, or indeed, due to opportunities to reduce them. As such, corporate taxation is a critical issue for policymakers and businesses. CORTAX is an economic model used to simulate the effects of corporate tax reform on corporate behaviour, government revenue, and the economy as a whole. It can provide insights for policymakers and researchers, who seek to evaluate the effects of corporate tax policies on the economy. In addition to simulating macroeconomic variables, such as GDP, investment, and employment, the model is also designed to capture key aspects of corporate income taxation, such as multinational profit shifting, investment decisions, loss compensation, and debt-equity financing. The model has been designed to examine potential policy reforms, such as adjusting or harmonizing the CIT rate or base, addressing debt bias in CIT, and consolidation of the multinational CIT base. CORTAX was originally built by economists at the Centraal Planbureau (CPB), Netherlands, (Bettendorf and van der Horst, 2006) drawing on the earlier OECDTAX model (Sorensen, 2001). CORTAX has been used in studies of corporate tax reform including corporate tax harmonisation and the common consolidated corporate tax base (CCCTB; Bettendorf et al., 2010a; Bettendorf et al., 2010b, Álvarez-Martínez et al., 2016a), the debt bias in corporate taxation (de Mooij and Devereux, 2011) and the impact of corporate taxation on the labour market (Bettendorf et al., 2009a). Subsequent studies addressed the impacts of varying corporate tax rates (Álvarez-Martínez et al., 2019) and produced estimates of the size of corporate tax base erosion and profit shifting (Álvarez-Martínez et al., 2021). It has also been used in a number of European Commission Impact Assessments ( 1 ) starting with the proposal for a Common Consolidated Corporate Tax Base (CCCTB) in 2011 (European Commission, 2011). This proposal was updated and substantially revised in a subsequent Impact Assessment (European Commission, 2016). CORTAX simulations then contributed to the Impact Assessments relating to the Fair Taxation of the Digital Economy (European Commission, 2018) and the Debt-Equity Bias Reduction Allowance (DEBRA; European Commission 2022). This JRC Technical Report outlines an updated calibration for CORTAX to a base year of 2019. The choice of 2019 is due to lag in the availability of certain variables, and the choice to avoid the exceptional years of 2020 and 2021 due to the COVID crisis, as CORTAX aims to reflect a stable, long-run economy. CORTAX 2019 models 30 countries, namely each of the EU 27, the UK, the USA, and Japan. Additionally, there is a notional tax haven, to which a proportion of profits can be shifted. To explain the context in which the calibration was undertaken, this report first outlines the structure of CORTAX in Section 2. This section highlights the relationships between the key agents in CORTAX and salient features of the model. Section 3 details the data that are used and their sources, followed by the parameters used, which are either estimated or selected based on the literature. Section 4 presents selected baseline characteristics of the model, such as key elasticities by country. Section 5 concludes with a discussion of potential future developments of the model. 1 European Commission Impact Assessments are ex-ante studies carried out prior to finalising a proposal for a new law. They seek to “examine whether there is a need for EU action and analyse the possible impacts of available solutions”. 3 2 Structure of CORTAX CORTAX is designed to simulate the economic effects of tax policy reforms at the national and international level. The model accounts for the transactions between firms (distinguishing between domestic firms and multinational enterprises), households, and governments. Each country features interactions between consumption, savings, production, and public finances. The model incorporates international trade in goods markets, investment by multinational enterprises, international capital flows, and intermediate inputs within multinationals (which serve as a vehicle to model transfer pricing across borders). Firms are divided into three categories: MNE headquarters, which are linked to an MNE subsidiary in each of the other countries, and domestic firms that only operate in their home country. All firms maximise their profits, with MNEs optimising their global profits, including engaging in profit shifting activities across borders. All firms have some access to a notional tax haven, where they shift some of their profits, though the amount of profits shifted is smaller for domestic firms. All firms face compliance costs of fulfilling their corporate tax obligations. CORTAX is a multi-country model with a full calibration for each of the 30 countries modelled (the EU Member States, the UK, the USA and Japan). The general equilibrium framework of the model captures the interactions between different economic actors, including those between multinational headquarters and foreign subsidiaries. The model solves for the long-run steady state equilibrium producing various macroeconomic aggregates, such as GDP, total household consumption, investment, and tax revenues. It is designed to simulate reforms in the corporate tax system, such as changes in the tax rates, tax base, harmonisation across countries, and consolidation of the tax base. The following sub-sections outline the components of CORTAX. We focus on describing the behaviour of the economic relationships ( 2 ). 2.1 Households Households maximise their lifetime utility subject to their lifetime budget constraint. Households live for two generations: young (age 20 – 59) and old (age 60 – 99). Households receive utility from consumption and disutility from working. Young households choose their levels of work, consumption and savings so as to maximise their inter-temporal utility. In the process, they account for transfers received from the government, taxes on income and consumption paid to the government, and the interest rate received on their savings. Households prefer a savings portfolio that include both bonds and stocks. They are imperfect substitutes, with stocks offering a higher rate of return than bonds. The gross return to bonds and stocks are determined on world markets. CORTAX calculates a welfare change as part of its output results. The value shown in the difference in transfers that would need to be received by young households (positive or negative) to compensate for the change in lifetime utility (the compensating variation). 2.2 Firms and production CORTAX features three firm types: domestic firms, multinational headquarters and multinational subsidiaries. Each country has one representative domestic firm and one multinational headquarters. This headquarter owns a representative subsidiary in each of the other countries ( 3 ). Firms maximise their value subject to the production function and accumulation constrains. The firms’ value is equal to the net present value of the flow of future profits. Production in all firms involves labour, capital, and a fixed, location-specific production factor (which can be considered as representing land). Labour and capital are imperfect substitutes, and so are combined in the model within a constant elasticity of substitution (CES) function to produce value-added. Value-added is combined with the fixed factor in a Cobb-Douglas function to produce the final output. Note that the existence of the fixed factor ensures that part of the corporate tax falls on rents. 2 Readers interested in the model equations are referred to Bettendorf and van der Horst (2006), Bettendorf et al. (2009) and Álvarez-Martínez et al. (2016) for further details. 3 As explained below, when the FDI stocks between an investor and destination country, that multinational subsidiary is not modelled. 4 In the case of multinational subsidiaries, there is another factor of production, namely an intermediate input, which is purchased from the multinational headquarters. For subsidiaries, this intermediate input is included in the Cobb-Douglas production function with value-added and the fixed factor. The intermediate input is a crucial link between the multinational headquarters and each subsidiary. By manipulating the price of this intermediate input, the multinational can shift a portion of its profits to lower tax jurisdictions, as explained in the next sub-section. Aggregate production within each country in the total production by the domestic firm, the multinational headquarters and all the subsidiaries located in that country. 2.3 Profit shifting: between countries and to the tax haven Profit shifting between countries is modelled between multinational headquarters and their associated subsidiaries. The subsidiaries purchase an intermediate input from the headquarters, for which the armslength price is taken to be one. Multinationals deviate from this price in order to shift profits either to the subsidiary (a price below one) or to the headquarters (a price above one). This allows the multinational headquarters to move a portion of its taxable base to or from the subsidiary country. The benefit from deviating from the arms-length price depends on the difference between the statutory corporate tax rates between the location of the headquarters and subsidiary. The cost of deviating is taken to be a convex function, such that profit shifting becomes increasingly costly at the margin. The cost function reflects the reality that there are limits and risks for the firm, the more it deviates from the arms-length price, and also mathematically ensures that the model reaches an interior solution. The model allows firms to shift part of their tax base to a tax haven. This is modelled as a separate channel for profit shifting than transfer pricing between multinational headquarters and subsidiaries outlined above. The extent to which this occurs is parameterised in line with the literature, in particular the elasticity estimates of a meta-regression study with multinational firms considerably more able to take advantage of tax haven than domestic firms (Heckemeyer & Overesch, 2013). Firms in the model recognise that not all of their CIT tax base will be subject to the statutory tax rate, meaning that their effective statutory tax rate is reduced. 2.4 Compliance Costs The model incorporates the compliance costs incurred by firms in meeting their corporate tax obligations. These costs are measured in terms of the number of new workers required to fulfil these tasks. Effectively, this results in two types of labour: the vast majority of workers who produce output and a small share of workers who handle tax administration. The latter group is calculated as a fixed proportion of the productive labour force and increases in proportion to the size of the firm's payroll. 2.5 Corporate Investment and FDI Foreign direct investment (FDI) refers to the equity-financed part of foreign capital (i.e., not including the debt-financed part). The initial size of subsidiaries is calibrated using data on the bilateral FDI stock (the methodology is explained in more detail below). Corporate investments can be funded through retained earnings or by issuing bonds, as CORTAX does not permit the issuance of new shares. The decision on the source of finance is determined by comparing the after-tax costs of debt and equity. The model considers the marginal cost of debt to increase as the debt share rises, resulting in an optimal debt ratio and aligning with empirical evidence that firms typically choose a mix of debt and equity financing. 2.6 Cost of capital The main channel through which corporate tax impacts investment is through the cost of capital. The effective marginal tax rate (EMTR) quantifies the impact of corporate taxes by calculating the cost of capital with and without taxes, and expressing this as a percentage of the tax-inclusive cost of capital. It effectively summarises several aspects of the tax system, such as the statutory tax rate, depreciation allowances, and the value of losses carried forward. It typically has a positive value, indicating the corporate tax increases the cost of capital. 11 3.2.1 Model Equation Parameters The model equation parameters are selected according to the standard values found in the literature. They range from parameters specifying the intertemporal substitution elasticities to the time preference to the substitution elasticity between bonds and equity. The share of domestic corporate profits taxed as corporate profits is equal to one in the base model, implying that this is the treatment for all domestic corporate profits. The weighting factor for EATR, which is one in the base model, implies that all of the weighting goes on the effective average tax rate, rather than the effective marginal tax rate. Both these factors can be adjusted in simulations, if desired. The cohort length is 40 years, referring to the two periods of life modelled: young (age 20-59) and old (age 60-99), which forms part of the household lifetime optimisation choice. Table 1. Model equation parameters. Description CORTAX Name 2019 intertemporal substitution elasticity 1 σl 1 intertemporal substitution elasticity 2 𝜎𝑢 0.5 time preference ρ u 1.01 taste for bonds in savings 𝛼𝑠 0.7 substitution elasticity bonds-equity 𝜎𝑠 4 multiplier in debt cost equation 𝜒0 0.015 elasticity of marginal cost of transfer pricing 𝜀𝑞 1 Parameter used for endogenous interest rate, bonds 𝛾0,𝑏 0.01 Parameter used for endogenous interest rate, equity 𝛾0,𝑒 0.01 share of domestic corporate profits taxed as corporate profits (vs labour income) 𝑠ℎ𝑎𝑟𝑒𝑝 1 Weighting factor for the computation of the EATR 𝛼𝐸𝐴𝑇𝑅 1 cohort length (length of young/old period in years; age 20-59/60-99) 𝑇 40 Source: CORTAX 2019. 3.2.2 Long-Run Data Estimates The values selected seek to reflect the long run values, and may not reflect the base year. Necessarily, there is a certain amount of judgement involved. Note also that growth rates are identical for all countries in order to avoid an explosive long run solution. 12 Table 2. Parameters: long-run data estimates. Description CORTAX Name 2019 world rate of return on bonds 𝑟𝑤𝑏 0.015 world rate of return on equity 𝑟𝑤𝑒 0.03 technological growth 𝑔𝑎 0.015 inflation rate 𝑔𝑝 0.01875 GDP growth rate (steady state) 𝑔𝑦 0.0227 Source: CORTAX 2019. 3.2.3 Production Parameters The following parameters relate to creating the production structure. The fixed factor in production is a notional device that ensures that some production is derived from a country-specific immovable production factor, such as land. (It also ensures that some positive corporate tax is optimal.) It is assumed that the use of this factor is skewed towards domestic firms, more than MNEs. It is also assumed that share of the fixed factor is 2.5% in the production function, hence the share of value added in production is 0.975. Intermediate inputs is introduced into the model to capture transfer pricing between countries. The share of intermediate inputs in the production process of subsidiaries of MNEs, next to labour, capital and the fixed factor, is assumed to be 10%. The probability of making positive profits, as opposed to a loss, is estimated from the data. The substitution elasticity between labour and capital is selected to be less than one (0.7). Table 3. Production parameters. Description CORTAX Name 2019 share of domestic firms in fixed factor 𝜔𝑑 0.7 share of multinationals in fixed factor, MNE-HQ 𝜔𝑚 0.3 share of value added in production, domestic firms, 𝛼𝑣,𝑑 0.975 share of value added in production, MNE-HQs 𝛼𝑣,𝑚 0.975 share of intermediate inputs in production, MNE subsidiaries 𝛼𝑞 0.1 probability of making non negative profits, domestic firms 𝑞𝑓𝑑 0.78 probability of making non negative profits, MNEs 𝑞𝑓 0.78 substitution elasticity labour-capital 𝜎𝑣 0.7 Source: CORTAX 2019. 3.2.4 Profit Shifting Parameters The following parameters relate specifically to profit shifting to tax havens. The tax rate in the notional tax haven is selected to be 5%, chosen to be between the merely low rates of certain countries that are used as tax havens and the extremely low rates found in other tax havens. Given this rate in the notional tax haven, the elasticity values are selected to match estimates of profit-shifting elasticity. Details are provided in Álvarez-Martínez et al. (2020). 13 Table 4. Profit shifting parameters. Description CORTAX Name 2019 tax rate in tax haven 𝜏𝑝ℎ 0.05 elasticity of profit shifting to tax haven 𝛾𝑠ℎ 0.9 tax-elasticity of profit shifting to tax haven (domestic firms) 𝜋𝑠ℎ,𝑑0 0.206 tax-elasticity of profit shifting to tax haven (MNEs) 𝜋𝑠ℎ0 0.648 Source: CORTAX 2019. 14 4 Baseline Characteristics of the 2019 Calibration The calibration and structure of CORTAX determine how the model responds to policy reforms or any exogenous shock. To help explain this response, we calculate and explain here some key statistics that emerge from the model ( 6 ). 4.1 Financial Distortions In CORTAX, the cost of financial distress is a key determinant of the impact of corporate tax on the firms’ financial behaviour in terms of debt or equity financing. In general, all countries feature a positive semielasticity of the debt share with respect to the corporate income tax rate. Thus, an increase in the CIT rate leads to an increase in firms’ debt share as debt interest payments are deductible from the CIT base. However, the cost of financial distress is a convex function, which causes the semi-elasticity to fall with the corporate tax rate. This is demonstrated in Figure 1, which shows the semi-elasticities of the debt share with respect to the corporate tax rate for all countries with the prevailing corporate tax rate in each. Figure 1. Semi-elasticity of the debt share w.r.t. the corporate tax rate. Source: Own calculations using CORTAX 2019 ( 7 ). 4.2 Investment Distortions Corporate tax clearly impacts on investment decisions in CORTAX. The channel of transmission is that corporate tax changes the cost of capital, which in turn, changes the optimal level of investment. Figure 2Error! Reference source not found. reports the semi-elasticity of investment with respect to the corporate tax rate, which ranges for the countries under consideration from -0.14 down to -0.61. The differences can be largely understood by noting the differences in the baseline marginal effective tax rate (METR): high METRs lead to a larger (more negative) semi-elasticities, as can be seen in the figure. 6 Further discussion about how CORTAX elasticities relate to the wider literature can be found in Bettendorf et al. (2009). 7 The semi-elasticities in this section are produced within the model by introducing a marginal increase in the corporate tax rate and re-solving the model to find the new equilibrium values for the debt share (Figure 1), investment (Figure 2), the transfer price (Figure 3), and the tax base (Figure 4). Comparing these with the base values allows the elasticities to be inferred directly. AUT BEL DNK FIN FRA DEU GRC HRV IRL ITA LUX NLD PRT ESP SWE GBR CYP CZE EST HUN LVA LTU MLT POL SVK SVN BGR ROM USA JPN 0 0.05 0.1 0.15 0.2 0.25 0.3 0.35 0.4 0% 5% 10% 15% 20% 25% 30% 35% 40% Semi-elasticity of the debt share with respect to the corporate tax rate Corporate tax rate 15 Figure 2. Semi-elasticity of investment w.r.t. the corporate tax rate. Source: Own calculations using CORTAX 2019. (See footnote 7 for details.) 4.3 Transfer Pricing Distortions Transfer pricing in CORTAX incurs convex costs, which increase as more transfer pricing is undertaken. As a result of the shape of this function, countries with corporate tax rates in the base adjust the amount of transfer pricing more with corporate tax rates changes. This relationship is shown in Figure 3. AUT BEL DNK FIN FRA DEU GRC HRV IRL ITA LUX NLD PRT ESP SWE GBR CYP CZE EST HUN LVA LTU MLT POL SVK SVN BGR ROM USA JPN -0.7 -0.6 -0.5 -0.4 -0.3 -0.2 -0.1 0 0% 2% 4% 6% 8% 10% 12% 14% 16% Semi-elasticity of investment with respect to the corporate tax rate Marginal effective tax rate 16 Figure 3. Semi-elasticity of investment w.r.t. the corporate tax rate. Source: Own calculations using CORTAX 2019. (See footnote 7 for details.) 4.4 Profit shifting to tax havens A proportion of the corporate tax that would be collected is shifted to a notional tax haven in CORTAX. The amount of profit shifting is determined by the convexity of the cost of profit shifting function (the values are explained in the Parameters section 3.2 above). The semi-elasticity of the corporate tax base with respect to the corporate tax rate is shown on the vertical axis in Figure 4. Countries with low statutory tax rates, such as Hungary or Bulgaria, face very low elasticities, whilst those with higher statutory tax rates, such as France or Malta, face higher elasticities. An important determinant is that countries with more FDI stocks (inward or outward) will feature larger elasticities of profit shifting, as shown in the figure. (Note that the horizontal axis is on a log scale for readability, because most countries bunch as a share of GDP between 0.1 and 1.) AUT BEL DNK FIN FRA DEU GRC HRV IRL ITA LUX NLD PRT ESP SWE GBR CYP CZE EST HUN LVA LTU MLT POLSVK SVN BGR ROM USA JPN -2.5 -2 -1.5 -1 -0.5 0 0% 5% 10% 15% 20% 25% 30% 35% 40% Semi-elasticity of transfer price with respect to corporate tax rate Corporate tax rate 17 Figure 4. Semi-elasticity of tax base due to profit shifting w.r.t. the corporate tax rate. Source: Own calculations using CORTAX 2019. (See footnote 7 for details.) AUT BEL DNK FIN FRA DEU GRC HRV IRL ITA LUX NLD PRT ESP SWE GBR CYP CZE EST HUN LVA LTU MLT POL SVK SVN BGR ROM USA JPN -0.45 -0.4 -0.35 -0.3 -0.25 -0.2 -0.15 -0.1 -0.05 0 0.1 1 10 Semi-elasticity of the tax base in % of GDP due to profit shifting with respect to the corporate tax rate Inward + Outward FDI as share of GDP (log scale) 18 5 Conclusions and outlook CORTAX continues to be a valuable tool to analyse the macroeconomic impacts of corporate tax reforms. Indeed, few such tools have been developed and maintained ( 8 ). CORTAX has been particularly useful in the context of ex-ante analysis of a variety EU-wide reforms, demonstrating a capacity to capture the salient features and how they impact the macroeconomic environment. As the model that is being actively used for policy work, model developments respond to demands from policy-makers. Depending on the policy area, additional data or equations can sometimes be added to address a particular issue, drawing upon the wider corporate tax research as appropriate. An ongoing challenge is to maintain the model as up-to-date as possible, given the high data requirements. Across the countries modelled in CORTAX (the EU27 Member States, the USA, the UK and Japan), some changes in the corporate tax rates occur fairly frequently, as do some of the rules for calculating the tax base. We are looking to automate this process to the extent possible to allow for new calibrations to be produced in the most timely manner possible. An interesting avenue for development would be to extend CORTAX to include multiple sectors. Indeed, some previous work has already simulated a two-sector version of CORTAX, which split out the digital economy into its own sector. This could be accomplished by combining the current model structure with some elements of a more traditional computable general equilibrium (CGE) structure. The advantage of this would be to analyse corporate tax reforms that were targeted at particular categories of production. 8 Ferrari et al. (2022) is a notable exception. Despite being similar in nature, their general equilibrium model is tailored towards modelling the extent and directions of firms’ profit shifting but is more limited in terms of scope for policy options. For example, it does not allow to model the impact of a change to a system of formulary apportionment, nor adjustments to the relative attractiveness of debt and equity financing of firms, both of which have taken centre stage in recent CIT reform proposals. 19 References Álvarez-Martínez, María T., Salvador Barrios, Diego d'Andria, Maria Gesualdo, Dimitris Pontikakis and Jonathan Pycroft, ‘Modelling corporate tax reform in the EU: New calibration and simulations with the CORTAX model’, DG TAXUD Taxation Papers No. 66, European Commission, 2016. Álvarez-Martínez, María T., Salvador Barrios, Leon Bettendorf, Maria Gesualdo, Diego d'Andria, Simon Loretz, Dimitrios Pontikakis and Jonathan Pycroft, ‘A New Calibration for CORTAX: A computable general equilibrium model for simulating corporate tax reforms’. JRC Working Papers on Taxation and Structural Reforms 201609, European Commission, 2016. 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