Formulary Apportionment – is this Alternative to the Arm’s Length Standard Possible and Practical Under the United States’ Current Tax Treaties?

The Internal Revenue Service (IRS) estimates that the United States is losing approximately $2b per year because foreign corporations operating in the United States are not paying their fair share of income tax.2 Others believe much more than $2b is lost per year.3 While there is no consensus on the actual amount of revenue being lost, most commentators agree that the losses are a result of deficiencies in the current arm’s length taxation system designed to tax corporations’ multi-jurisdictional income. Some argue that the arm’s length system is inherently inadequate and should be discarded in favour of a formulary apportionment method of taxation. Others argue that the arm’s length method is being administered improperly and that administrative adjustments in the current system would alleviate part of the income tax evasion problem.