Allocating Business Profits for Tax Purposes: A Proposal to Adopt a Formulary Profit Split

Avi-Yonah, Reuven S.; Clausing, Kimberly A.; Durst, Michael C.

doi:10.2139/ssrn.1317327

Cited by 59 publications

(44 citation statements)

References 19 publications

(11 reference statements)

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“…The role of (international) loss consolidation 12 References 36 Tables Table 1 Number of firms in MNE groups, by location and owner country groups 15 Table 2 Descriptive statistics profit and loss and apportionment factors 16 Table 3 Baseline results for total assets as apportionment factor 19 Table 4 Baseline results for different apportionment factors 23 Table 5 Results for tax reported, balanced subsample for different apportionment factors 27 Table 6 Results for profit allocation using segmental reporting 28 Table A1 Baseline results for tangible assets as apportionment factor 30 Table A2 Baseline results for turnover as apportionment factor 31 Table A3 Baseline results for number of employees as apportionment factor 32 Table A4 Baseline results for payroll as apportionment factor 33 Table A5 Baseline results for two-part apportionment factor according to Avi-Yonah et al (2009) …”

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“…In contrast, apportionment according to turnover or cost of employees will allocate a larger share to higher income countries. Similarly a two-part apportionment formula in the spirit of Avi-Yonah et al (2009) would also benefit high-income high-tax countries (here the assumed rate of return on operating expenses crucially affects the results). Finally we investigate the impact on tax revenue, which seems to be slightly positive (in the range of two to four per cent) -although strong assumptions are necessary to make such an estimate.…”

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International Distribution of the Corporate Tax Base: Implications of Different Apportionment Factors Under Unitary Taxation

Cobham

Loretz

2014

SSRN Journal

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SummaryUnder the current system of separate accounting, tax-motivated international profit shifting results in misalignment of profits and real economic activity. While the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting initiative aims to measure and curtail this, critics claim serious progress is only possible with greater emphasis on formulary apportionment methods (Picciotto 2013), or other methods outside the present international tax architecture (IMF 2014). In this paper we use the leading global database of company balance sheets to compare the distribution of profit and potential apportionment factors. Although data coverage is problematic for developing countries, we find that apportioning profit according to measures of actual economic activity would result in a major redistribution of the tax base at the expense of a particular group of jurisdictions, and in most cases towards the lower-income countries in the sample. International loss consolidation facilitated by a global switch to unitary taxation would reduce the overall tax base by around 12 per cent.

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International Distribution of the Corporate Tax Base: Implications of Different Apportionment Factors Under Unitary Taxation

Cobham

Loretz

2014

SSRN Journal

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“…To understand the difference, I will explore the potential distortions of a SACFT in more detail in the next section. 5 Auerbach and Devereux found "an effective tax or subsidy on consumption" due to the SACFT; in the previous section, I found no such distortion. To understand why, consider the general case of a profit maximizing monopolist.…”

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confidence: 81%

The Economic Distortions of a Border-Adjusted Corporate Cash Flow Tax

McGee

2017

SSRN Journal

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“…These profits can then be apportioned to each jurisdiction according to a formula and be taxed by the relevant state (Picciotto 1992;1 Available at <https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/207771/Lough_Erne_2013_G8_Leaders _Communique.pdf> accessed 15 June 2014. Yonah et al 2009). As unitary taxation holds out the prospect of limiting the possibility of profit shifting and the accompanying erosion of the tax base, the relationship between it and the role of accounting has to be considered.…”

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Unitary Taxation: Tax Base and the Role of Accounting

Murphy¹,

Sikka²

2015

SSRN Journal

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SummaryFor more than twenty years there have been discussions on the issue of multinational corporations shifting profits from high-to low-tax jurisdictions, with resulting gains to them from the resulting reduction in their effective tax rate. Underpinning much of this debate has been an implicit assumption that, first of all, profits are a fixed and constant known factor in this tax baseshifting equation; and, secondly, that by adopting consistent international financial reporting standards (IFRSs) the risk of arbitraging on tax is removed from this equation. Arguments for unitary taxation have particularly advanced this assumption.We seek to show that the relationship between tax and financial reporting is now remote, and that no jurisdiction that we can identify relies upon unadjusted traditional accounting profit as a basis for the taxation of corporate income. This paper argues that this problem would, if anything, increase with dependence upon IFRSs, which serve entirely different purposes. IFRSs contain many subjective elements within their concepts of income and expenses, to provide the certainty that tax reporting requires. We draw instead upon the thinking underpinning the European Union's (EU's) Common Consolidated Corporate Tax Base (CCCTB), to suggest that tax-specific measures of income and expenses for taxation purposes need to be defined. Such a transactional approach provides a potential basis for developing unitary taxation and determining a taxation base that could then be apportioned to each jurisdiction. However, in the practical political context the EU needs to be sensitive to the interests of member states, which have an interest in adopting particular ways of dealing with deductibility of interest, royalty payments and allowances for capital expenditure. In order to secure political momentum for change, we suggest that for the time being such contentious matters be deferred by allowing relief on these items to be granted at a national level after apportionment of other income between participating states in a regional unitary tax system. The paper then makes some suggestions for the development of a conceptual framework for taxation accounting standards that could be used to address these issues.

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Allocating Business Profits for Tax Purposes: A Proposal to Adopt a Formulary Profit Split

Cited by 59 publications

References 19 publications

International Distribution of the Corporate Tax Base: Implications of Different Apportionment Factors Under Unitary Taxation

International Distribution of the Corporate Tax Base: Implications of Different Apportionment Factors Under Unitary Taxation

The Economic Distortions of a Border-Adjusted Corporate Cash Flow Tax

Unitary Taxation: Tax Base and the Role of Accounting

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