Formulary apportionment

Formulary apportionment, also known as unitary taxation, is a method of splitting the total pre-tax profit earned (or loss incurred) by a multinational between the tax jurisdictions where it does business. It is an alternative to separate entity accounting, under which a branch or subsidiary within the jurisdiction is accounted for as a separate entity, requiring prices for transactions with other parts of the corporation or group to be assigned according to the <a href="/facts/Arm%27s_length_principle/KuMzk3WJ">arm's length</a> standard commonly used in <a href="/facts/Transfer_pricing/bcpUV2X0">transfer pricing</a>. In contrast, formulary apportionment attributes a portion of a multinational's total worldwide profit (or loss) to each jurisdiction, based on factors such as the proportion of sales, assets or payroll in that jurisdiction.
When applied to a corporate group, formulary apportionment requires <a href="/facts/Combined_reporting/oVt6eNG7">combined reporting</a> of the group's results. The parent and all of its subsidiaries are viewed as though they were a single entity (unitary combination), and the method is then also known as worldwide unitary taxation. In the US, most states have adopted water's edge combined reporting which restricts the taxable group to just US domestic corporations and excludes "overseas business organization", i.e., unitary foreign affiliates and foreign parents.

Formulary apportionment open-in-new

Formulary apportionment