Sharing the Corporate Tax Base: Equitable Taxing of Multinationals and the Choice of Formulary Apportionment

Abstract

Tax avoidance by multinational enterprises (MNEs) is a global problem. Most cross-border trade occurs within MNEs, susceptible to abuse of gaps and loopholes in domestic and international tax law that allow “profit shifting” between fiscal jurisdictions in order to reduce corporate tax liability. A lack of transparency makes this kind of tax avoidance difficult to quantify – let alone to monitor and control. This paper provides a case study of profit shifting using publicly available, unique, country-by-country reporting data for Vodafone Group Plc, the first large MNE to voluntarily publish such data. We show the tax impact of a move to formulary apportionment on a global basis, and under the European Union’s Common Consolidated Corporate Tax Base proposal. We also consider the rationale for the current proposals for apportionment factors and propose an alternative.

Keywords: transfer pricing, formulary apportionment, CCCTB, developing countries, tax avoidance, horizontal equity, vertical equity, equal distribution, taxing rights