International taxation and the frustrations of formulary apportionment estimation

Abstract

Purpose

The purpose of this paper is to investigate the challenges faced by empirical researchers investigating a shift from taxing multinational entities using the arm’s length system to a formulary apportionment system. Theoretically, a shift should increase global tax collections as profits currently attributed to low or no tax jurisdictions are allocated to jurisdictions with true input or output factors and shift the allocation between these countries. Before any jurisdiction seriously contemplated a shift from an arm’s length allocation system to a formulary apportionment regime, however, it would want to estimate the revenue impact of such a change.

Design/methodology/approach

The paper systematically analyzes empirical papers that attempt to estimate the effects of formulary apportionment on country and global income revenue collected to determine the challenges faced by researchers.

Findings

The paper determines that there are both data and geo-political constraints that relate to (1) the method used to calculate the global profits of a multinational enterprise, (2) whether jurisdictions wish to adopt a global or regional formulary apportionment, (3) the weightings to be given to the factors used in the formulary apportionment, (4) the challenges of measuring sales at destination and the viability of surrogate measurements, (5) whether natural resources should be included in the measurement of the capital input factor, and (6) whether a redistribution objective should be included in the profit allocation formula.

Originality/value

Estimating the changes is challenging both in terms collecting the data needed for the calculations and the choice of design options to be tested. The paper provides synthesized knowledge in relation to the difficulties in estimating the effects of moving to a formulary apportionment model for taxing multinational entities.

Citation

Sadiq, K., Krever, R. and Bhatia, D. (2024), "International taxation and the frustrations of formulary apportionment estimation", Journal of Accounting Literature, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JAL-05-2023-0076