Bloomberg advocates profit apportionment

Amid U.S. plans for tax reform led by Senate Finance Committee Chairman Max Baucus, Bloomberg News has published an editorial in which it says:

"Baucus could propose a version of the system the multinationals are suggesting, in which only U.S. activity is subject to U.S. taxes -- but instead of basing the tax on how much income a company earns in the U.S., he could base it on the portion of sales that are made in the U.S.

This approach, called formulary apportionment, is how most U.S. states levy taxes on companies that operate across state lines. Its appeal is straightforward: While earnings can be booked where taxes are lowest, goods and services follow the customer. Apportionment would therefore eliminate the tax incentive for U.S. companies to move earnings offshore. The European Union is considering a similar system for its members.

This approach wouldn’t be pain-free. For instance, tax treaties with other countries would have to be renegotiated. But it would be worth the effort if the current Baucus proposal gets bogged down and a more politically robust alternative to the status quo is needed. The worst outcome would be to do nothing, leaving in place a system that makes no sense at all."

Formulary apportionment is an ugly term: we often prefer 'profit apportionment' (or 'profit apportionment by formula', which gives a clearer idea of what's going on. (If you have no idea what we're talking about, see this introduction here, and click through to the main report.) Sales isn't necessary the only component of a useful formula, but overall the approach is right.

More support for our proposal (well, it's not originally ours, but we have been pushing it hard and quite effectively recently.) We hope that the OECD, which currently dominates international rule-making, slowly stops being so terrified of it.

Update 2014: for resources and information on Transfer Pricing see here.