The Case for Unitary Taxation with Formulary Apportionment in the Finance Sector and the Effect on Developing Nations

In 2013 the OECD released its 15-point action plan to deal with base erosion and profit shifting (BEPS), which recognised that BEPS has a significant effect on developing countries because the lack of tax revenue can lead to a critical underfunding of public investment that would help promote economic growth. To this end, the BEPS project is aimed at ensuring an inclusive approach to take into account not only views of the G20 and OECD countries but also the perspective of developing nations. The purpose of this article is to consider a possible solution to profit shifting which occurs under the current transfer pricing regime, with that solution being unitary taxation with formulary apportionment. It does so using the finance sector as a specific case for application. Multinational financial institutions (MNFIs) play a significant role in financing activities of their clients in developing nations. Consistent with the “follow-the-client” phenomenon that explains financial institution expansion, these entities are increasingly profiting from activities associated with this growing market. Further, not only are MNFIs persistent users of tax havens but also, more than other industries, have opportunities to reduce tax through transfer pricing measures. This article establishes a case for an industry-specific adoption of unitary taxation with formulary apportionment as a viable alternative to the current practice. While it would be difficult for developing nations to adopt such a regime, it is argued that it would be no more difficult than addressing issues they face with the current transfer pricing regime