How would formulary apportionment work?
Under the current U.S. system of international taxation, U.S. resident multinational firms must determine their profits separately in each tax jurisdiction in which they operate. A system of formulary apportionment would replace this separate accounting method with a formula that allocates a multinational firm’s worldwide income across countries. The formula would reflect the distribution of the firm’s worldwide economic activity, as measured by some combination of sales, payroll, and capital stock. The firm would then pay U.S. taxes only on the share of world income that is allocated to the United States. Moving to formulary apportionment would address many problems of the current U.S. system. It would dramatically reduce incentives to shift economic activity or income to low-tax countries, it would treat similar firms similarly regardless of where they are incorporated, and it would eliminate much administrative complexity. But because it would have major effects on virtually all mul
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