Formulary Apportionment: Myths and Prospects - Promoting Better International Tax Policy and Utilizing the Misunderstood and Under-Theorized Formulary Alternative
Reuven S. Avi-Yonah
University of Michigan Law School
Hebrew University of Jerusalem - Faculty of Law
October 16, 2010
U of Michigan Law & Econ, Empirical Legal Studies Center Paper No. 10-029
U of Michigan Public Law Working Paper No. 221
This paper seeks to re-examine the formulary alternative to transfer pricing by inquiring whether partial integration of formulary concepts into current practices would offer a reasonable alternative to transfer pricing rules. We believe that the key to achieving an equitable and efficient allocation of MNE income is to solve the problem of the residual, i.e., how to allocate income generated from mobile assets and activities whose risks are born collectively by the entire MNE group. These assets and activities generate most of the current transfer pricing compliance and administrative costs, as well as tax avoidance opportunities. A limited formulary tax regime that allocates only the residual portion of MNE income may therefore offer significant advantages. Furthermore, such a regime would not require significant deviations from current practices, or substantial modifications of the international tax regime.
Number of Pages in PDF File: 30
Keywords: Transfer Pricing, Arm's Length Standard, Formulary Apportionment
JEL Classification: H25, H26
Date posted: October 16, 2010 ; Last revised: November 18, 2010
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