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Formula Apportionment: Is it better than the current system and are there better alternatives?


  • Rosanne Altshuler

    () (Rutgers University)

  • Harry Grubert

    () (U.S. Treasury Department, Office of Tax Analysis)


This analysis of formula apportionment compared to the current system is based on the observation that income shifting has two sources, intangible income and debt. The analysis also recognizes that a major goal of the transfer pricing or income allocation system is to preserve the tax neutrality between arm’s length and related party transactions and between multinational and single jurisdiction companies. It therefore develops a model that highlights these features. Both separate accounts (SA) and formula apportionment (FA) distort behavior but along different margins. Under SA, companies have an incentive to shift high-tech activities and to manipulate transfer prices. Under FA, companies do not manipulate transfer prices but they have an incentive to shift routine activities abroad and to change the degree to which they depend on outside suppliers. Simulations based on the model indicate that FA has no clear advantage over SA even when the model assumes that an unrealistically large amount of resources are devoted to tax planning under SA. Furthermore, straightforward changes could be made in SA that would result in substantial improvements without resorting to full-fledged FA. We also examine the complicating role of financial assets under FA and how ongoing R&D is implicitly allocated. The conceptual basis for the conventional formulas are discussed, particularly ones based on sales. Finally, a static, no behavioral change, estimate of the effect of FA on the tax liabilities of US multinational corporations is presented for 1996 and 2004. The static estimate for 2004 suggests a potentially large revenue gain, but the simulations show that tax revenues under FA and SA are similar when behavioral responses are taken into account.

Suggested Citation

  • Rosanne Altshuler & Harry Grubert, 2009. "Formula Apportionment: Is it better than the current system and are there better alternatives?," Working Papers 0901, Oxford University Centre for Business Taxation.
  • Handle: RePEc:btx:wpaper:0901

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    Cited by:

    1. Raymond Mataloni & Kim Ruhl & Dylan Rassier & Fatih Guvenen, 2016. "Offshore Profit Shifting and Domestic Productivity Measurement," 2016 Meeting Papers 1382, Society for Economic Dynamics.
    2. Wolfram F. Richter, 2017. "Taxing Intellectual Property in the Global Economy: A Plea for Regulated and Internationally Coordinated Profit Splitting," CESifo Working Paper Series 6564, CESifo Group Munich.
    3. Wildasin, David E., 2010. "State Corporation Income Taxation: An Economic Perspective on Nexus," National Tax Journal, National Tax Association;National Tax Journal, vol. 63(4), pages 903-924, December.
    4. repec:kap:itaxpf:v:25:y:2018:i:3:d:10.1007_s10797-017-9471-2 is not listed on IDEAS
    5. Dhammika Dharmapala, 2016. "The Economics of Corporate and Business Tax Reform," CESifo Working Paper Series 5864, CESifo Group Munich.
    6. Fuest, Clemens & Spengel, Christoph & Finke, Katharina & Heckemeyer, Jost H. & Nusser, Hannah, 2013. "Profit shifting and 'aggressive' tax planning by multinational firms: Issues and options for reform," ZEW Discussion Papers 13-078, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    7. Jennifer Bruner & Dylan G. Rassier & Kim J. Ruhl, 2018. "Multinational Profit Shifting and Measures throughout Economic Accounts," NBER Chapters,in: The Challenges of Globalization in the Measurement of National Accounts National Bureau of Economic Research, Inc.
    8. Dhammika Dharmapala, 2018. "The Consequences of the TCJA's International Provisions: Lessons from Existing Research," CESifo Working Paper Series 7249, CESifo Group Munich.
    9. Eichfelder, Sebastian & Hechtner, Frank & Hundsdoerfer, Jochen, 2015. "Formula apportionment: Factor allocation and tax avoidance," arqus Discussion Papers in Quantitative Tax Research 199, arqus - Arbeitskreis Quantitative Steuerlehre.
    10. Eichfelder, Sebastian & Hechtner, Frank & Hundsdoerfer, Jochen, 2015. "Formula apportionment: Factor allocation and tax avoidance," Discussion Papers 2015/30, Free University Berlin, School of Business & Economics.
    11. Ortmann, Regina & Pummerer, Erich, 2015. "Formula apportionment or separate accounting? Tax-induced distortions of multinationals' locational investment decisions," arqus Discussion Papers in Quantitative Tax Research 198, arqus - Arbeitskreis Quantitative Steuerlehre.
    12. Harry Grubert & Rosanne Altshuler, 2013. "Fixing the System: An Analysis of Alternative Proposals for the Reform of International Tax," National Tax Journal, National Tax Association;National Tax Journal, vol. 66(3), pages 671-712, September.
    13. Eichfelder, Sebastian & Hechtner, Frank & Hundsdoerfer, Jochen, 2017. "Formula apportionment: Factor allocation and tax avoidance," arqus Discussion Papers in Quantitative Tax Research 220, arqus - Arbeitskreis Quantitative Steuerlehre.
    14. repec:bpj:aelcon:v:7:y:2017:i:1:p:4:n:5 is not listed on IDEAS
    15. Harry Grubert, 2014. "Book Review: Fixing U.S. International Taxation by Daniel N. Shaviro (Oxford University Press, 2014, New York, Ny, 223 Pages)," National Tax Journal, National Tax Association;National Tax Journal, vol. 67(3), pages 745-754, September.
    16. repec:eee:jiaata:v:27:y:2016:i:c:p:26-39 is not listed on IDEAS

    More about this item


    Corporate taxation; Separate Accountin; Formula Apportionment;

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