Formulary Apportionment and International Tax Rules

Any proposal to adopt unitary taxation (UT) of multinationals has to contend with whether such taxation is compatible with existing international tax rules, and, in particular, with the bilateral tax treaty network. Indeed, some researchers have argued that the separate accounting (SA) method and the arm’s length standard (ALS), introduced in the early twentieth century, are so embodied in the treaties that they form part of customary international law, and are binding even in the absence of a treaty. We disagree, because the unitary approach is just as widely embodied in most of the current international tax treaties, and, where there are no treaties, national laws allow for a unitary approach to taxation. In this chapter we will argue that UT can be compatible with most existing tax treaties, and that developing countries, in particular, can implement it in most cases with or without a tax treaty and in accordance with their domestic laws