Multilateral Formulary Apportionment Model - A Reality Check
Australian Tax Forum (2010) Volume 25 Number 1 pp 95-136
42 Pages Posted: 29 Jul 2013
Date Written: January 15, 2010
The multilateral formulary apportionment (“FA”) model has been hailed as the solution for the existing transfer pricing regime for several decades. The most recent and ambitious attempt to apply the model is the Common Consolidated Corporate Tax Base (“CCCTB”) project currently being considered in the EU. The project, with its transparent policy, provides extensive documentation on not only major issues arising from applying the model in the real world, but also alternative policies and debates over those issues.
The CCCTB experience provides a unique opportunity to road test multilateral FA model in the real world. After reviewing the arguments put forward for the model in the past few decades, the paper analyses the problems of implementing the model in practice in light of the detailed information available from the CCCTB project. The analysis suggests that the multilateral FA model fails to demonstrate clear superiority over the existing transfer pricing regime. The CCCTB experience also highlights the formidable political obstacles that hinder the application of the model in practice. It is doubtful whether implementation of the model can be justified on policy grounds, or is achievable at all.
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