Thursday, October 10, 2019
Cliff Fleming (BYU) presents Is Unilateral Formulary Apportionment Better Than the Status Quo? (with Robert Peroni (Texas) & Stephen Shay (Harvard)) at the Institute for Austrian and International Tax Law of the Vienna University of Economics and Business:
It’s doubtful that the world’s large-economy countries will adopt formulary apportionment in a coordinated movement that yields a uniform regime. The more likely scenario is that a formulary apportionment adopter will be a unilateral actor winding up with a system that does not mesh well with the systems of its major trading partners.
This paper points out that formulary apportionment does not require adoption of a territorial system. Formulary apportionment can be used in a worldwide regime to identify foreign-source income for foreign tax credit purposes. Thus, the unilateral adoption issue, with its uncoordinated results, is relevant even for countries that contemplate maintaining some form of worldwide taxation with a limited foreign tax credit.
This paper’s principal purpose is to examine and evaluate the factors that any country must consider when contemplating replacement of the arm’s-length approach with formulary apportionment. Among those factors are:
- Will incentives to shift business activity and/or profits to low-tax foreign countries increase or decrease?
- Will double taxation and/or double non-taxation increase or decrease?
- Will systemic complexity increase or decrease?
- What will be the costs of renegotiating the unilateral actor’s income tax treaties to permit replacement of the arm’s length approach with formulary apportionment?
- Can the treaty mutual agreement procedure operate successfully when the unilateral actor has treaty partners that continue to employ the arm’s-length approach? If not, what is the cost?
This factor analysis does not yield a uniformly applicable answer to the question of whether a country will be better off if it unilaterally adopts formulary apportionment. Instead rigorous cost/benefit analysis must be performed in light of the subject country’s particular situation.