Formulary Apportionment in the European Union

Abstract

The European proposal on a Common Consolidated Corporate Tax Base suggests a sharing mechanism based on the application of an apportionment formula. This formula includes three different factors (labour, assets and sales) with equal weighting. Despite the virtues of this method, we believe that the suggested formula is far from being consistent from an economic point of view and that European institutions should revise it before continuing with the negotiation process. In order to design a new formula, it is vital to take into consideration the objectives of the European proposal and the growing concern about the phenomenon of profit shifting in the EU context. In the light of these premises, two different alternatives are analysed in this article. On the one hand, we refer to the possibility of using a two-factor formula for distributing the tax base amongst Member States, based on assets and labour as productive factors. On the other, we suggest a formula exclusively based on sales as an income-generating factor. Although both alternatives are far from being perfect, we conclude that a single-sales factor formula offers a large number of advantages and is an efficient method to fight against profit shifting strategies.