CORTAX model

Overview

CORTAX (short for CORporate TAXation) is a computable general equilibrium (CGE) model designed to evaluate the macro-economic effects of unilateral and multilateral corporate tax reforms. It includes the 27 countries of the European Union, plus the UK, the US, Japan and a fictional tax haven country.

Features

CORTAX incorporates many key features of existing corporate tax regimes, including 

• multinational profit shifting
• investment decisions (cost of capital)
• loss compensation
• the debt-equity choice of firms

These features enable the Joint Research Centre (JRC) to investigate a wide range of corporate income tax (CIT) reforms, such as 

• tax base harmonisation
• changes of the corporate tax rate
• the removal of CIT incentives for debt financing of investment decisions

The model also allows for the examination of the effects of multinational tax base consolidation, which addresses some of the issues concerning base erosion and profit shifting (BEPS).

Given the choices companies face when confronted with CIT reforms, it is important to assess the effects of these reform under a general framework. CORTAX captures the interactions between the different economic agents and by considering the dynamic behavioural responses of firms (including multinational enterprises or MNEs) and households, it provides a more realistic assessment of tax policy changes.

In this context, a key feature of the model is the breakdown of firms into 3 categories

• domestic firms
• MNEs’ headquarters
• MNEs’ foreign subsidiaries

Crucially, MNEs and domestic firms differ to the extent that the former optimise profits globally and engage in profit shifting activities across borders.

For an accurate representation of real economic activity, CORTAX has been calibrated with the data from established sources including Eurostat, the OECD, UN, ZEW Mannheim, and company-level information from the Bureau van Dijk Orbis database, with additional parameter values sourced from economics literature. The modelling and calibration of CIT-related compliance costs also enables the JRC to simulate the effects of tax code simplification.

Support to policy

The Joint Research Centre (JRC) has been using CORTAX to support important European Commission tax initiatives, including proposals for a common consolidated corporate tax base, taxation of the digital economy, the debt-equity bias and the Communication on Business Taxation for the 21st Century.

The CORTAX model has acquired a strong reputation among corporate tax experts. The model was originally produced by the Netherlands Bureau for Economic Policy Analysis (CPB), and has since been used by experts affiliated to Oxford University for Business Taxation, Erasmus University Rotterdam, Tinbergen Institute and research network, CESifo.

Documentation and publications