Revisiting Unitary Taxation With Formulary Apportionment Using Public Country-by-country Reports

The debate about the merits of adopting a new system for taxing multinational enterprises (MNEs) using global formulary apportionment continues despite progress on the two-pillar solution proposed by the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting. The difficulty in obtaining appropriate firm-level data to assess the impact of the proposed alternative is a key feature of the extant literature. The authors contribute to the debate by analysing newly available country-by-country reporting (CbCR) data voluntarily disclosed by 13 firms headquartered or listed in the United Kingdom (UK) to address two questions. First, the authors assess the suitability of CbCR data for determining the consolidated pre-tax profit base of MNEs and the subsequent allocation of those profits across jurisdictions. Secondly, the authors calculate counterfactual jurisdiction level pre-tax profits to determine the extent of any misalignment. The authors find heterogeneity in CbCRs which inhibits a precise determination of the global pre-tax profit base and impedes comparisons across firms primarily due to different CbCR frameworks (OECD BEPS Action 13 or GRI 207). Accordingly, the authors recommend harmonisation of reporting frameworks. The authors also find substantial pre-tax profits would be reallocated from tax havens and to developing countries conditional on the formula applied, although the UK benefits in all scenarios.