An Assessment of Global Formula Apportionment

IMF Working Papers, October 11, 2019

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An Assessment of Global Formula Apportionment

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Bibliographic details

• Authors: Ruud A. de Mooij, Li Liu, Dinar Prihardini
• Published: October 11, 2019
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781513516257.001

Overview

• Authors: Ruud A. de Mooij, Li Liu, Dinar Prihardini
• Publication date: October 11, 2019
• Paper type: IMF Working Papers
• Core topic: Formula apportionment as an alternative to the current international tax regime based on separate accounting for attributing taxable profits of multinationals across jurisdictions.
• Pages: 41
• Volume: 2019
• Issue: 213
• Series: Working Paper No. 2019/213
• DOI: https://doi.org/10.5089/9781513516257.001
• Stock No: WPIEA2019213
• ISBN: 9781513516257
• ISSN: 1018-5941

Analytical approach and datasets

• Reviews existing literature and discusses experiences in selective federal states to evaluate economic properties of formula apportionment relative to separate accounting.
• Analysis exploits different datasets to assess direct revenue implications for individual countries under alternative apportionment formulas.
• Keywords and subject coverage include: Corporate income tax, Employment, Formula apportionment, Labor, National accounts, Personal income, Revenue administration, Taxes, company group, company transaction, data from ORBIS, enterprise tax, Europe, Global, International corporate taxation, Multinationals, non-loss-making company, parent company, revenue effect, tax competition, tax enforcement, taxable income, WP.

Key findings

• Formula apportionment eliminates profit shifting within multinational groups.
• Formula apportionment introduces new distortions and affects tax competition.
• Distributional effects across countries are large, reflecting major discrepancies between:
  • where profits are currently attributed, and
  • where factors of production are located or sales take place.
• The largest revenue losses appear in investment hubs (defined as countries with a disproportionate ratio of foreign direct investment to GDP).
• Several large advanced countries are likely to gain under formula apportionment.
• Developing countries:
  • Gain most likely if employment receives a large weight in the formula.
  • Tend to benefit, on average, from a formula based on sales by destination.

Policy implications and considerations

• Trade-offs:
  • Benefit: elimination of within-group profit shifting.
  • Cost: emergence of new distortions and changed dynamics of tax competition.
• Design choices matter materially for revenue distribution:
  • Weighting employment heavily favors developing countries.
  • Weighting sales by destination tends to benefit developing countries on average.
• Revenue implications are country-specific and depend on the chosen formula and underlying factor distributions (production location, employment, sales, foreign direct investment patterns).

An Assessment of Global Formula Apportionment — Ruud A. de Mooij, Li Liu, Dinar Prihardini; IMF Working Paper No. 2019/213; October 11, 2019; Pages: 41; DOI: https://doi.org/10.5089/9781513516257.001

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