The Tax Policy Outlook for Developing Countries: Reflections on International Formulary Apportionment

The author offers a retrospective analysis of his recently-completed extensive research on the technical feasibility of international formulary apportionment of corporate taxable income, as a replacement for the body of ‘arm’s-length’ transfer pricing rules generally in use around the world. In this retrospective analysis the author considers recent analytical work on base erosion and profit shifting (BEPS) conducted by the Organisation for Economic Cooperation and Development (OECD) as well as the International Monetary Fund (IMF). The author focuses especially on the needs of developing countries, which, because of problems associated with informal economic activity, need to rely more heavily on corporate income taxation than wealthier countries. The author generally agrees with the approach taken by both the OECD and IMF, which (i) would rely on targeted measures to curtail BEPS and would not seek to fully replace arm’s-length rules with a formulary system, but (ii) would nevertheless incorporate elements of a formulary approach in order to remedy apparent defects in some important aspects of current arm’s-length rules.