The JRC is currently developing a tailored corporate tax microsimulation model for the EU. The primary focus of this model is to provide valuable insights into the fiscal and distributional impact of corporate income tax (CIT) reforms.
The DiRECT model (short for Distributional and Revenue Effects of Corporate Taxes) considers many key features of the existing corporate tax regimes in the EU, including tax depreciation of fixed assets, limitation of interest deductibility, dividend exemption, tax loss offset, (domestic) tax group consolidation and allowance for corporate equity. Importantly, through a multi-period framework, the model incorporates the temporary nature of many of these provisions, most notably tax loss carry-backs and carry-forwards. This enables the JRC to conduct a comprehensive analysis of national tax systems and CIT reforms across the EU.
The microsimulation model utilizes firm-level financial accounting data to provide a link to real economic activity. Using highly disaggregated data on firms’ capital structure and financial revenue, the model accounts explicitly for any differences between financial accounting and tax accounting. When disaggregated data is not available, the model uses econometric and statistical methods to predict the distribution of relevant items across the entire universe of firms. Finally, the model pays particular attention to existing corporate ownership links to simulate the treatment of tax groups across the EU.
By employing firm-level data, the model aims to equip policymakers with a tool for evaluating the distributional implications and revenue effects of CIT reforms. The model captures the individual fiscal impact resulting from changes in tax policy, facilitating a better understanding of how changes in corporate taxation directly affect firms. This enables policymakers to gain insights into the specific financial consequences experienced by businesses, allowing for evidence-based decision-making processes. In this regard, the microsimulation model complements the computable general equilibrium model CORTAX , which assess the macro-economic consequences of CIT reforms.