Formulary apportionment - myths and prospects: promoting better international tax policies by utilizing the misunderstood and under-theorized formulary alternative

This article seeks to re-examine the formulary alternative to transfer pricing by inquiring whether partial integration of formulary concepts into current practices would offer a reasonable alternative to transfer pricing rules. The authors believe that the key to achieving an equitable and efficient allocation of multinational enterprise (MNE) income is to solve the problem of the residual, i.e., how to allocate income generated from mobile assets and activities whose risks are borne collectively by the entire MNE group. These assets and activities generate most of the current transfer pricing compliance and administrative costs, as well as tax avoidance opportunities. A limited formulary tax regime that allocates only the residual portion of MNE income may therefore offer significant advantages. Furthermore, such a regime would not require significant deviations from current practices, or substantial modifications of the international tax regime.