Cover of EconPol Policy Brief 35

Taxing the Residual Profit of Multinational Enterprises: A Critique of Formulaic Apportionment and a Proposal

Wolfram F. Richter (TU Dortmund University, CESifo Munich, IWH Halle, IZA Bonn)

In the context of a changed digital economy, the OECD has put forward a proposal that requires large multinational companies to pay some of their income taxes where revenue is generated; i.e. in countries where the consumers or users are located. It is suggested that taxing rights should be allocated using a revenue-based formula. This policy brief argues against the use of such a rule that requires the multilateral assessment of MNEs’ worldwide profit. The need to define a common consolidated tax base would disproportionately complicate the search for po-litical agreement within the Inclusive Framework. Instead, the OECD should apply more practical rules that rely on unilateral profit splitting and do not require uniform international rules on ac-counting. Countries could be granted the right to impose a withholding tax on outbound pay-ments, such as payments for digital services. To the extent that there are allocable costs, as for example with pharmaceuticals and vaccines, these should be tax-deductible on the condition that the country receiving the payments adopt the new tax regime.  

Abstract

According to plans put forward by the OECD/G20 Inclusive Framework on BEPS, a share of residual profit earned by eligible MNEs is to be taxed by market jurisdictions. For this purpose, revenue-based formulaic apportionment of residual profit is proposed. This note argues against the use of a rule requiring the multilateral assessment of MNEs’ worldwide profit and recommends an alternative method of sharing taxing rights with market jurisdictions. The proposed method relies on unilateral profit splitting and is suggested by the application of Shapley value theory to the fair and equitable division of taxing rights between cooperating jurisdictions.

Citation

Wolfram F. Richter: "Taxing the Residual Profit of Multi-National Enterprises: A Critique of Formulaic Apportionment and a Proposal", EconPol Policy Brief 35, May 2021