Formulary Apportionment - a realistic alternative to the arm's length principle within the EU?
(2001)Department of Law
- Abstract
- The international accepted standard today, which is used for tax purposes to attribute profits between related enterprises operating in different countries, is the so-called arm's length principle. The arm's length principle states that transfer prices between related enterprises have to be the same amount as transfer prices in comparable transactions between unrelated enterprises. The principle has been criticized mainly because it does not take into account the interrelation and integration that exists between related enterprises and because the method is difficult to administrate. On the other hand, the principle is rather flexible and works well in most cases. In several federal states, for instance between the individual states in the... (More)
- The international accepted standard today, which is used for tax purposes to attribute profits between related enterprises operating in different countries, is the so-called arm's length principle. The arm's length principle states that transfer prices between related enterprises have to be the same amount as transfer prices in comparable transactions between unrelated enterprises. The principle has been criticized mainly because it does not take into account the interrelation and integration that exists between related enterprises and because the method is difficult to administrate. On the other hand, the principle is rather flexible and works well in most cases. In several federal states, for instance between the individual states in the US, a formulary apportionment is used. Instead of employing separate accounting as in the arm's length principle, this method determines the geographic source of corporate taxable income on the basis of a predetermined formula. The most commonly used formulas in the US are payroll, property and sales. A formulary apportionment method defines first the apportionable tax base. This depends on whether the income, property etc. belongs to the unitary business which is conducted in a particular state. Thereafter, it apportions the taxable income of the unitary business between the local state jurisdiction and the rest of the involved states on the basis of the amount of payroll, property and sales that is assignable to each state. A formulary apportionment method is less flexible than the arm's length principle but it takes into account the fact that related business groups are integrated and interdependent and demands a less administrative burden both for tax administrations and taxpayers. A formulary apportionment method demands a rather homogenous economy to work efficiently which is the reason why it is used mainly in federal states. Since the integration and harmonization of rules in the European Union goes further and further, the question arises whether a formulary apportionment method may be an alternative to the arm's length principle within the EU. Especially since the progress made in the field of a common currency and common accounting standards, shows that a formulary apportionment may work well in the EU. However, the conclusion of the thesis is that the EU is still not ready for a shift from the arm's length principle to a formulary apportionment method. The reason for this is the fact that the EU is still not such a homogenous area as the US and the fact that it would be an almost overwhelming task for the Member States to reach agreements on questions such as, what should constitute a unitary business and which factors should be used, and the fact that the EU in the foreseeable future will accept a number of new member States, all with different tax systems (Less)
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http://lup.lub.lu.se/student-papers/record/1557476
- author
- Fjordevik, Tomas
- supervisor
- organization
- year
- 2001
- type
- H3 - Professional qualifications (4 Years - )
- subject
- keywords
- Skatterätt
- language
- English
- id
- 1557476
- date added to LUP
- 2010-03-08 15:55:21
- date last changed
- 2010-03-08 15:55:21
@misc{1557476,
abstract = {{The international accepted standard today, which is used for tax purposes to attribute profits between related enterprises operating in different countries, is the so-called arm's length principle. The arm's length principle states that transfer prices between related enterprises have to be the same amount as transfer prices in comparable transactions between unrelated enterprises. The principle has been criticized mainly because it does not take into account the interrelation and integration that exists between related enterprises and because the method is difficult to administrate. On the other hand, the principle is rather flexible and works well in most cases. In several federal states, for instance between the individual states in the US, a formulary apportionment is used. Instead of employing separate accounting as in the arm's length principle, this method determines the geographic source of corporate taxable income on the basis of a predetermined formula. The most commonly used formulas in the US are payroll, property and sales. A formulary apportionment method defines first the apportionable tax base. This depends on whether the income, property etc. belongs to the unitary business which is conducted in a particular state. Thereafter, it apportions the taxable income of the unitary business between the local state jurisdiction and the rest of the involved states on the basis of the amount of payroll, property and sales that is assignable to each state. A formulary apportionment method is less flexible than the arm's length principle but it takes into account the fact that related business groups are integrated and interdependent and demands a less administrative burden both for tax administrations and taxpayers. A formulary apportionment method demands a rather homogenous economy to work efficiently which is the reason why it is used mainly in federal states. Since the integration and harmonization of rules in the European Union goes further and further, the question arises whether a formulary apportionment method may be an alternative to the arm's length principle within the EU. Especially since the progress made in the field of a common currency and common accounting standards, shows that a formulary apportionment may work well in the EU. However, the conclusion of the thesis is that the EU is still not ready for a shift from the arm's length principle to a formulary apportionment method. The reason for this is the fact that the EU is still not such a homogenous area as the US and the fact that it would be an almost overwhelming task for the Member States to reach agreements on questions such as, what should constitute a unitary business and which factors should be used, and the fact that the EU in the foreseeable future will accept a number of new member States, all with different tax systems}},
author = {{Fjordevik, Tomas}},
language = {{eng}},
note = {{Student Paper}},
title = {{Formulary Apportionment - a realistic alternative to the arm's length principle within the EU?}},
year = {{2001}},
}