The Czech evidence for the explanatory power of formula factors on profitability

Abstract

The allocation formula for the distribution of the Common Consolidated Corporate Tax Base (CCCTB) should include the three equally weighted formula factors that are considered to have the largest impact on the generation of profit/loss. The objective of the paper is to analyse the explanatory power of the proposed formula factors from the perspective of Czech independent enterprises. The analysis is based on the comparison of coefficients of determination as the indicators of explained variability of a regression model. The paper concludes that the proposed formula factors, as defined by the CCCTB Draft Directive, are able to explain almost 35% of the variance in profit/loss but also indicates that the other balance sheet items can have a higher explanatory power.