Can the Income Tax Be Saved?: The Promise and Pitfalls of Unitary Formulary Apportionment

49 Pages Posted: 4 May 2007

See all articles by Julie Roin

Julie Roin

University of Chicago Law School

Date Written: April 9, 2007


Most developed nations raise a substantial portion of their revenues through the imposition of corporate and individual income taxes. But recent economic developments, and particularly the increasing globalization of capital markets, has made enforcement of national income taxes increasingly difficult. A primary cause of these difficulties lies in countries' failure to devise effective methods of taxing the domestic income of foreign corporations. All too often, such income ends up taxed no where. Not surprisingly and all too successfully, taxpayers strive to arrange their affairs so that their income becomes such no where income. It is hard to see how the corporate, and perhaps even the individual income tax can survive as an effective revenue raising device unless and until countries devise an effective method of taxing the domestic income of foreign corporations.

Increasingly, academics and EU bureaucrats have come to believe that the solution to the problem of nontaxation of international income lies in replacing the current arm's length, separate entity based taxing regimes, which rely on transfer prices and source rules to determine the amount of income earned by and taxed in the hands of domestic operating entities, with unitary formulary taxing regimes similar to those used by some states of the United States. This paper examines the prospects for success of formulary taxing regimes by looking at the experiences of the States of the United State, which have operated such regimes, as well as the experience of the United States, in its operation of the subpart F regime. It concludes that many taxpayers will avoid the reach of unitary formulary tax systems by rearranging their business practices, thus reducing the gains expected from the adoption of unitary formulary tax regimes.

Keywords: international taxation, transfer pricing, subpart F, formulary taxation

JEL Classification: K34, H25

Suggested Citation

Roin, Julie, Can the Income Tax Be Saved?: The Promise and Pitfalls of Unitary Formulary Apportionment (April 9, 2007). U of Chicago, Public Law Working Paper No. 170, Available at SSRN: or

Julie Roin (Contact Author)

University of Chicago Law School ( email )

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