Separate accounting vs. Formulary Apportionment
Krittikorn Wudhibawornpat 4414356
MSc International Business Finance
May 21st, 2012
Academic Year 2012/13
Table of Contents
INTERNATIONAL TAXATION SYSTEM4
RIGHT TO TAX COMPANY6
TRANSFER PRICING PROBLEM7
FORMULARY APPORTIONMENT 8
- BENEFITS OF FORMULARY APPORTIONMENT 8
- DRAWBACKS OF FORMULARY APPORTIONMENT9
FEASIBILITY OF COMMON CONSOLIDATED TAX BASE (CCTB) 9
Multinational corporations have to make an informed choice of where the parent company would reside (Barrios et al., 2005). Additionally, they are called upon to decide whether to set up a subsidiary or a branch in the foreign nation. All these decisions have serious tax implications on the multinational. However, it should be noted that tax considerations are not exclusive in determining suitability of location. Assets, means of production and commercial factors like market availability may be crucial to such decisions (Bond et al., 2000). In principle, the parent nation reserves the right to impose tax on the overall income of the multinational. Some countries would however prefer to impose tax on income. The selection of a company’s residence would therefore determine whether income generated outside the parent nation would be a subject of additional taxation.
The choice between a subsidiary and branch is equally of the essence. However, most businesses outside the jurisdiction of the parent nation prefer the subsidiary form of establishment. Income such as dividends accruing from a subsidiary nation is first taxed in that nation at a corporate level. The subsidiary may decide to impose a non-resident withholding tax to the dividends. This leaves a fraction of its which may be ploughed back into the business or repatriated to the parent company (Altshuler et al., 1993)....