Practical Aspects of Implementing Formulary Apportionment in the European Union

Authors

• Joann Martens Weiner, George Washington University

Abstract

After analyzing many options, the Commission settled on the strategy of allowing EU MNE's to use a common consolidated corporate tax base(CCCTB) to calculate their EU level profits and to use formulary apportionment (FA) to distribute a share of the consolidated EU tax base to each Member States according to the location of their business activity. Member States will continue to apply their own tax rates to their share of the EU tax base. The EU CCCTB with FA will be optional so that EU multinational companies may continue to use national tax systems.

This article addresses some practical aspects involved in implementing formulary apportionment in the European Union. It first describes the basic landscape for company tax reform in the EU and identifies pressures coming from the European Court of Justice on Member States to reform their company tax systems. It also describes the work being conducted by the CCCTB Working Group at the European Commission.

Second, it draws on experience from the U.S. states and Canadian provinces to set forth the basic contours of a formulary apportionment systemin the EU. It also deals with certain international issues, including technical aspects that arise when the scope of the system is limited to the boundaries of the EU. The U.S. state experience can be very helpful in this analysis, especially concerning the scope of the tax base and the definition of the formula. All U.S. states now allow multinational companies to limit application of their formulary apportionment system to the geographical boundaries of the U.S. (known as the water's edge). In moving away from worldwide taxation with formulary apportionment, the states have resolved many of the issues that the EU Commission faces as it heads into the final stages of its project.

Third, the paper evaluates some of the pioneering research in this area on the economic effects of FA on investment and business location decisions. These papers evaluate particular aspects that deal with introducing a formulary method for taxing multinational companies in the EU.

Recommended Citation

Joann Martens Weiner, Practical Aspects of Implementing Formulary Apportionment in the European Union, 8 Fla. Tax Rev. (2008).
Available at: https://scholarship.law.ufl.edu/ftr/vol8/iss1/12