Formulary Apportionment: More Simple - on Balance Better?

By Christensen, Steve | Law and Policy in International Business, Summer 1997 | Go to article overview

Formulary Apportionment: More Simple - on Balance Better?


Christensen, Steve, Law and Policy in International Business


I. INTRODUCTION

In January 1996, the Department of the Treasury announced an upcoming conference to examine international tax issues and global formulary apportionment.(1) More specifically, the conference, held in December 1996, sought to explain the apparent international tax gap, to weigh the pros and cons of formulary apportionment compared to the arm's length approach, and to identify the problems of transitioning to a global formulary apportionment system. A special invitation to participate was extended to state governments, which, by and large, already practice formulary apportionment.(2) This Note examines the merits and shortcomings of the formulary apportionment system as contrasted to the arm's length system.(3) Because of its relative simplicity, formulary apportionment may be the better alternative for the future.

The issues addressed by the conference were especially difficult because "[m]ultijurisdictional companies are usually so thoroughly integrated that methods of dividing their income geographically are necessarily arbitrary and therefore controversial."(4) In fact, Justice Brennan has analogized the problem to "slicing a shadow."(5) With the growing global market, income attribution will become more complex and controversial. Formulary apportionment offers a striking theoretical contrast to the current arm's length approach.

II. HISTORY OF INCOME SOURCING

A. Formulary Apportionment as Applied by the States

In 1957, the National Conference of Commissioners on Uniform State Laws approved and recommended that states adopt the Uniform Division of Income for Tax Purposes Act (UDITPA). The principle endorsed by UDITPA was relatively simple: apportion income based on the factors of production. Thus, property owned or operated within the jurisdiction is used to measure capital employed by the entity, likewise, payroll is used to measure labor employed by the entity.(6) A third factor was added to represent the exploitation of the market--the sales factor.(7) Each factor is reduced to a fraction, the numerator of which is the activity within the jurisdiction and the denominator of which is the entity's entire activity. For example, the payroll fraction is the payroll within the jurisdiction divided by the entity's entire payroll. Each factor is equally weighted in determining a composite rate. The composite rate is then applied to apportionable income to determine the amount that is subject to the jurisdiction's income tax.

Although relatively simple in theory, UDITPA has generated considerable litigation in two areas.(8) First, how much activity within a state justifies the state taxing the activity in the first place? Second, what constitutes a unitary business, or in other words, how similar does the out-of-state activity have to be to the taxable in-state activity to be included within the apportionable tax base? The United States Supreme Court has addressed these questions several times, with results that vary with the Court's interpretation of the Due Process Clause and the Commerce Clause. Notwithstanding the litigation and the Constitutional challenges the unitary system has remained relatively stable and unchanged throughout its forty year history. The UDITPA apportionment system or some variation is currently used in every state that imposes income taxes.(9)

B. Arm's Length as Applied by the Federal Government

Soon after the development of UDITPA, the federal government faced a similar question of how to apportion income to multiple international jurisdictions. It fashioned a different solution to the same problem. Unlike the states' approach, the federal government developed an arm's length/separate accounting method of income attribution.(10) Rather than focus on the multi-jurisdictional entity as a whole, the separate accounting method breaks the entity into discrete taxable parts.(11) The method then determines an appropriate "arm's length" value for the transaction between related entities. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Formulary Apportionment: More Simple - on Balance Better?
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.