History and Theory of Formulary Apportionment

Abstract

This chapter examines the historical development of the formulary apportionment approach in key jurisdictions.

From the time income taxes were first widely enacted, tax designers have been concerned with the question of how to allocate profits in transactions that incorporated labour, capital or sales inputs across several jurisdictions if each jurisdiction wished to tax the income that was ‘sourced’ in that jurisdiction. The intuitive solution adopted almost universally for the earliest income and predecessor taxes when an enterprise operated across borders was to allocate a share of the profits to each jurisdiction that contributed to the total profits by reference to formulas incorporating the factors that were presumed to contribute to the generation of those profits. Most commonly, the first formulas were applied unilaterally on a jurisdiction-by-jurisdiction basis and often applied on a sectoral basis to particular industries.