Formula Apportionment: Is it Better than the Current System and are There Better Alternatives?
National Tax Journal, December 2010, 63 (4, Part 2), 1145–1184
40 Pages Posted: 19 Oct 2011 Last revised: 12 May 2013
Date Written: May 17, 2011
Abstract
This analysis of formula apportionment compared to the current U.S. system recognizes that income shifting has two main sources, excess returns attributable to intangibles and debt, and that a major goal of income division systems is preserving neutrality between arm’s length and related party transactions. A model demonstrates that separate accounts (SA) and formula apportionment (FA) distort behavior along different margins. Simulations indicate that FA has no clear advantage over SA. Static estimates of U.S. tax revenues under FA suggest potentially large increases, but simulations show that revenue under FA and SA is similar once behavioral responses are taken into account.
Keywords: formula apportionment, transfer pricing, income shifting, international taxation
JEL Classification: H25, H73, H87
Suggested Citation: Suggested Citation