Abstract.
We consider the corporate tax structuring problem (TaxSP), a combinatorial optimization problem faced by firms with multinational operations. The problem objective is nonlinear and involves the minimization of the firm's overall tax payments i.e. the maximization of shareholder returns. We give a dynamic programming (DP) formulation of this problem including all existing schemes of tax-relief and income-pooling. We apply state space relaxation and state space descent to the DP recursions and obtain an upper bound to the value of optimal TaxSP solutions. This bound is imbedded in a B&B tree search to provide another exact solution procedure. Computational results from DP and B&B are given for problems up to 22 subsidiaries. For larger size TaxSPs we develop a heuristic referred to as the Bionomic Algorithm (BA). This heuristic is also used to provide an initial lower bound to the B&B algorithm. We test the performance of BA firstly against the exact solutions of TaxSPs solvable by the B&B algorithm and secondly against results obtained for large-size TaxSPs by Simulated Annealing (SA) and Genetic Algorithms (GA). We report results for problems of up to 150 subsidiaries, including some real-world problems for corporations based in the US and the UK.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Altshuler, R., Fulghieri, P.: Incentive effects of foreign tax credits on multinational corporations. National Tax Journal 47, 349–361 (1997)
Bellman, R., Dreyfus, S.: Applied Dynamic Programming. Princeton University Press, Princeton, USA, 1962
Beasley, J.: Population heuristics. Internal Report, OR Section, Imperial College, London, UK, 1999
Christofides, N.: Graph Theory: An algorithmic approach. Academic Press, New York, USA, 1975
Christofides, N.: Mathematical models for international taxation. Centre for Quantitative Finance, Report CQF-00-18, Imperial College, London, 2000
Chowdhry, B., Coval, J.: Internal financing vs. multinational subsidiaries: Debt vs. Equity. J. of Corporate Finance 4, 87–106 (1998)
Christofides, N., Mingozzi, A., Toth, P.: State space relaxation procedures for the computation of bounds to routing problems. Networks 11, 145–164 (1981)
Chu, P., Beasley, J.: Constraint handling in genetic algorithms: the set partitioning problem. J. of Heuristics 4, 323–357 (1998)
Glover, F.: Genetic algorithms and scatter search: unsuspected potentials. J. Statistics and Computing 4, 131–140 (1994)
Glover, F.: Scatter search and star paths. OR Spektrum 17, 125–137 (1995)
Glover, F., Laguna, M.: Tabu search. Kluwer, Amsterdam, Netherlands, 1997
Kirkpatrick, S., Gelatt, C., Vecchi, M.: Optimization by simulated annealing. Science 220, 671–680 (1983)
Lin, S.: Computer solutions of the travelling salesman problem. Bell Sys. Tech. J. 44, 2245–2269 (1965)
Maniezzo, V., Mingozzi, A., Baldacci, R.: A bionomic approach to the capacitated p-median problem. J. of Heuristics 4, 263–280 (1998)
Mitchell, M.: An introduction to genetic algorithms. MIT Press, Boston, Massachusetts, USA, 1996
Reiling, H.: Note on US taxation of foreign-source corporate income. Harvard Business School, Case 9-292-101, Boston, Massachusetts, USA, 2001
Reeves, C.R.: Modern Heuristic Techniques for Combinatorial Problems. Blackwell, New York, USA, 1993
Author information
Authors and Affiliations
Corresponding author
Additional information
Support for this work was provided by the IST Framework 5 Programme of the European Union, Contract IST2000-29405, Eurosignal Project
Mathematics Subject Classification (2000): 90C39, 91B28
Rights and permissions
About this article
Cite this article
Christofides, S., Christofides, A. & Christofides, N. The design of corporate tax structures. Math. Program., Ser. B 98, 493–510 (2003). https://doi.org/10.1007/s10107-003-0416-4
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10107-003-0416-4