Estimating Impact of Formula Apportionment on Allocation of Worldwide Income and the Potential for Double Taxation |
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| Institution: | 1. Department of Economics, Tulane University, 208 Tilton Hall, New Orleans, LA 70118, United States;2. Department of Economics, Università Ca'' Foscari Venezia, Cannaregio 873, 30121 Venezia, Italy;3. Andrew Young School of Policy Studies, Georgia State University, 14 Marietta Street, Suite 429, Atlanta, GA 30303-3992, United States;4. Jesse H. Jones Graduate School of Business, Rice University, 221 McNair Hall, 6100 Main Street, Houston, TX 77005-1827, United States;5. Andrew Young School of Policy Studies, Georgia State University, 14 Marietta Street, Suite 637, 14 Marietta Street, NW, Atlanta, GA 30303-3992, United States;6. The African Tax Institute, University of Pretoria, South Africa;1. Institute of Information Systems and Marketing, Karlsruhe Institute of Technology, Germany;2. Faculty of Economics and Management, TU Berlin, Germany;3. School of Electrical Engineering and Computing, The University of Newcastle, Australia;1. International Business and Strategy, Henley Business School, University of Reading, Whiteknights Campus, Reading, Berkshire, RG6 6AH, United Kingdom;2. Fresno Pacific University, 1717 S. Chestnut Ave., Fresno, CA, 93702, USA;1. Danielle McConville, Queens University Belfast, UK;2. Carolyn Cordery, Aston University, UK;1. University of Innsbruck, Department of Strategic Management, Marketing and Tourism, MCI Management Center Innsbruck, Department of Management and Law, Innsbruck, Austria;2. Stockholm Business School, Stockholm University, 106 91 Stockholm, Sweden;3. MCI Management Center Innsbruck, Department of Management and Law, Innsbruck, Austria;4. Florida State University, Department of Management, 821 Academic Way, Tallahassee, FL 32306-1110, United States |
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| Abstract: | The issue of international transfer pricing and the allocation of worldwide income has become increasingly important as the number of multinational corporations (MNCs) has increased. An arm's-length transaction method of transfer pricing is currently the method required to assign worldwide income; however, evidence suggests that MNCs use the transfer-price mechanism to shift income between tax jurisdictions. As a result, a formulary apportionment method, similar to that used by the states, has been suggested as a preferred alternative. This paper develops a simulation model to investigate the impact on U.S. taxable income of MNCs if a formula apportionment model were adopted. Alternative simulation models explore the magnitude of potential for double taxation when two taxing jurisdictions use different formulary models. The results indicate that, in the aggregate, a decrease in U.S. taxable income could be expected. A relatively modest amount of formulary income is likely to be subject to double taxation when foreign jurisdictions weight the sales factor more heavily and income escapes taxation when the U.S. weights the sales factor more heavily. However, the impact for any single MNC could be significant. |
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