Abstract

From an international perspective, formulary apportionment has traditionally been viewed as little more than transfer pricing’s “poor relation” as a division-of-income methodology. It receives only grudging recognition as a method of attributing the profits to a permanent establishment under Article 7 of the OECD Model Tax Convention; it receives no mention at all in Article 9 as a method for distributing the profits of associated enterprises among the contracting states in which they conduct their activities; and it was assailed by the international business community and by the EU Member States as out of step with internationally excepted norms in the litigation in the United States over the constitutionality of the application of California’s worldwide combined reporting regime to multinational enterprises.

With the European Commission’s proposal for the use of formulary apportionment as a means of dividing the consolidated corporate tax base for companies’ EU-wide activities among the Member States, formulary apportionment may have acquired a new respectability in the international tax arena. There are important distinctions between the use of formulary apportionment within the framework of a political and economic union like the European Union and its use among countries that are not bound by a common legal framework, just as there are important distinctions between the use of formulary apportionment within a union of sovereign states and its use among sub-national states or provinces in a federal union like the United States or Canada. I will consider these contextual considerations below.

This article is part of a symposium devoted to “Income Allocation in the 21st Century: The End of Transfer Pricing” and discusses the benefits of allocating income based on the formulary apportionment methodology.

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