An Assessment of Global Formula Apportionment

42 Pages Posted: 8 Nov 2019

See all articles by Ruud A. De Mooij

Ruud A. De Mooij

International Monetary Fund (IMF); CESifo (Center for Economic Studies and Ifo Institute); Oxford University Centre for Business Taxation

Li Liu

International Monetary Fund (IMF)

Dinar Prihardini

International Monetary Fund (IMF)

Date Written: October 2019

Abstract

Formula apportionment as a way to attribute taxable profits of multinationals across jurisdictions is receiving increased attention. This paper reviews existing literature and discusses experiences in selective federal states to evaluate the economic properties of formula apportionment relative to the current international tax regime that is based on separate accounting. It highlights major advantages, such as the elimination of profit shifting within multinational groups; and it discusses new distortions and the impact on tax competition. The analysis exploits different datasets to assess the direct revenue implications for individual countries under alternative formulas. The distributional effects across countries are found to be large, reflecting major discrepancies between where profits are currently attributed and where factors of production are located or sales take place. The largest losses appear in investment hubs (i.e. countries with a disproportionate ratio of foreign direct investment to GDP), while several large advanced countries are likely to gain. Developing countries gain most likely if employment receives a large weight in the formula; they also tend to benefit, on average, from a formula based on sales by destination.

Keywords: Indicators of economic activity, Tax revenue, Tax competition, Tax bases, Tax rates, International corporate taxation, Multinationals, Formula apportionment., WP, MNEs, ORBIS, MNE, tax base, high-tax

JEL Classification: F23, H25, E01, K34, H2, H71, H83

Suggested Citation

De Mooij, Ruud A. and Liu, Li and Prihardini, Dinar, An Assessment of Global Formula Apportionment (October 2019). IMF Working Paper No. 19/213, Available at SSRN: https://ssrn.com/abstract=3482296

Ruud A. De Mooij (Contact Author)

International Monetary Fund (IMF) ( email )

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Washington, DC 20431
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Oxford University Centre for Business Taxation ( email )

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Oxford, Oxfordshire OX1 4AU
United Kingdom

HOME PAGE: http://people.few.eur.nl/demooij/

Li Liu

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Dinar Prihardini

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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