Recent UN tax negotiations have renewed attention on a long-standing issue in international taxation: how to allocate the profits of multinational enterprises (MNEs) across jurisdictions in a way that ensures countries receive their fair share of taxing rights. At its core, this debate concerns both (i) the principles that determine where and how profits should be taxed, and (ii) the technical and administrative mechanisms required to implement these principles effectively in an open and increasingly digitalized global economy.
Today’s international tax system is largely based on separate accounting, where countries can only tax the profits multinational groups declare locally. In this system, intra-group transactions are supposed to be priced as if they were happening between independent firms, in order to maintain profits where value is created and limit the ability to artificially shift profits to low-tax jurisdictions. In practice, this system, designed in the 1930s, is not robust to today’s globalized economy, where MNEs’ tax avoidance strategies reduce corporate tax revenues by up to 10% worldwide (Wier and Zucman, 2022). It is also increasingly hard to apply in an economy where firms can earn significant revenues in countries where they have little physical presence. Enforcement is further complicated by limited data and the complexity of multinational corporate structures.
Against this backdrop, formulary apportionment (FA) is being raised as a possible alternative in the context of UN negotiations. Under FA, profits would first be consolidated for the multinational group as a whole, and then shared across countries using a formula based on observable factors such as sales, assets, or payroll. The main idea is to reduce reliance on internal pricing and to link taxing rights more closely to measurable economic activity. The allocation of taxing rights under FA would make current tax avoidance strategies obsolete. However, FA is not a single, fixed model. Different versions depend on key design choices, such as which multinationals are covered, how much profit is included, how the system interacts with existing rules, and which factors are used in the formula. These choices can strongly affect both how taxing rights are redistributed and what incentives companies and governments face.
This brief aims to support the policy debate by explaining what “formulary apportionment” could mean in practice under different approaches. It provides rough estimates for alternative designs, showing how the size of the profit base covered—and the potential shift in taxing rights across countries—can vary depending on the scope and how profits are defined. It then outlines the main legal and practical challenges that could arise if only some countries participate, including risks of double taxation and interactions with existing tax treaties.
Finally, it reviews the main options for choosing formula factors, discussing the associated trade-offs, including data limitations, opportunities for manipulation, and the economic incentives they create.