30 Pages Posted: 16 Oct 2010 Last revised: 14 Apr 2015
Date Written: October 16, 2010
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.
Keywords: Transfer Pricing, Arm's Length Standard, Formulary Apportionment
JEL Classification: H25, H26
Suggested Citation: Suggested Citation
Avi-Yonah, Reuven S. and Benshalom, Ilan, Formulary Apportionment: Myths and Prospects - Promoting Better International Tax Policy and Utilizing the Misunderstood and Under-Theorized Formulary Alternative (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. Available at SSRN: https://ssrn.com/abstract=1693105 or http://dx.doi.org/10.2139/ssrn.1693105
By Hugh Ault