Towards A Benefit-Based Market Neutral Formulary Apportionment System in the EU: Reflections for the BEFIT Proposal

Abstract

The European Union’s latest tax reform project, ‘Business in Europe: Framework for Income Taxation’ (BEFIT), is a formulary apportionment regime. This article explains how the EU should design its formulary apportionment system that is fair for the EU Member States. This article argues that the normative framework should combine the benefit principle and the concept of Market Neutrality. This Benefit-Based Market Neutrality framework can cover multiple policies pursued by BEFIT and respect the diversity of different EU Member States. Moreover, by comparing the experiences in the US state taxation with the EU’s preparation work on the Common Consolidated Corporate Tax Base (CCCTB), the article concludes that the EU should implement a formula consisting of three equally weighted factors, the sales factor, the asset factor and the\ labor factor. After clarifying prevalent myths, this article negates the single sales factor formula option and embraces Intellectual property rights in the asset factor.

Keywords: EU, BEFIT, Formulary Apportionment

JEL Classification: K34