Unitary taxation with a global formulary approach as a realistic and appropriate option for developing nations: A Chinese case study

China’s transfer pricing regime and investigations into transfer pricing issues gained momentum in the late 1990s. Since then, China has indicated that it is of the view that because of its developing country status, with its unique economic and geographic factors, it faces a number of difficult challenges including a lack of appropriate comparables, quantification and allocation of location-specific advantages, and identification and valuation of intangibles. In the United Nations Practical Manual on Transfer Pricing, China highlights and expands its view on each of these challenges and of the four countries with commentary in Chapter 10, provides the most comprehensive discussion on the unique issues faced by developing and emerging economies. Interestingly, China goes so far as to mention formulary apportionment as a possible solution to the difficulties it faces in applying the arm’s length principle. Consistent with the concerns expressed by China, this article proposes that unitary taxation based on formulary apportionment should be considered as a more accurate method of determining China’s ‘fair share’ of profits to be taxed. There is already evidence that the current jurisdiction and allocation rules do not work for multinational entities and China has clearly expressed concern about the application of the current transfer pricing rules. As such, acceptance of an alternative model proposed as superior for multinational entities may not be as onerous as previously thought. To demonstrate this proposition the article establishes that a unitary taxation approach which reflects economic reality and is theoretically superior would, from a practical perspective, more easily and effectively ensure that the profits of multinational entities are taxed in the jurisdictions which give rise to those profits. In doing so, the article examines the commentary provided by China in the UN Practical Manual and compares that to Brazil, India and South Africa. It then considers the practicalities of the implementation of unitary taxation for developing nations in terms of the key components of such a regime arguing that it is a viable alternative to the current regime