Towards a Neutral Formulary Apportionment System in Regional Integration: a Critical Inquiry

Abstract

The traditional international tax regime faces challenges in the digital economy and is criticised for not fairly allocating taxing rights over the profits of multinational enterprises (MNEs)’ cross- border economic activities. Allocating taxing rights based on value creation is an urgent reform imperative. OECD’s Base Erosion and Profit Shifting (BEPS) project in 2015 is a reform effort to address this problem.

Since 2021, OECD’s Pillar One has established the “new” taxing rights of the market jurisdiction. OECD’s Pillar One uses a formula approach to decide the profit allocation. Such development shows that “formulary apportionment” (FA) could be a feasible option for tax reform. However, the core question remains: How should a fair FA be designed to allocate taxing rights? The article especially discusses the FA system in the European Union (EU).
The full text is at
https://pure.eur.nl/ws/portalfiles/portal/83033157/Towards_a_neutral_formulary_apportionment.pdf

Keywords: Formulary Apportionment, legal transplantation

JEL Classification: K34