Formulary apportionment is a method to allocate taxing rights of states. It is different from the OECD’s international taxation rules which are based on bilateral tax treaties and national transfer pricing rules. Formulary apportionment adopts a pre-decided formula to allocate the taxing rights on cross-border taxable activities. In a pre-decided formula, it is common to have various factors, such as sales, labour, asset of the taxpayers. Since early 20 th century, USA has a long history of formulary apportionment in the field of state taxation. Many states of USA adopt their own formulas to allocate their taxing rights upon some cross-state business activities. Based on the experiences and practice in USA, European Union has also an ambitious project: Common Consolidated Corporate Tax Base (CCCTB) Directive Proposal. This Directive aims to harmonize corporate tax base for all EU Member States and provide a uniform sharing formula, to allocate taxing rights of corporate tax to replace the traditional bilateral tax treaties and over complicated transfer pricing rules. This paper analyses the possibility of inflating the sales factor, both in USA and in the CCCTB Directive Proposal due to including items such as marketable securities and hedging transactions. The sales factor is the ratio between the sales of a specific group member company (the numerator) to the whole corporate group’ sales (the denominator). One obvious possibility is to inflate the ratio by including items in the denominator, such as marketable securities, hedging transactions. In USA, these items are no longer defined as sales in the formula, and thus are excluded from the formula. However, the CCCTB Directive has not fully eliminated this problem of inflating the sales factor, and thus leaves a loophole.

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Journal Indian Journal of Tax Law
Chen, S.-C. (2018). Tax Avoidance in the Sales Factor: Comparison between the CCCTB and USA’s Formulary Apportionment Taxation. Indian Journal of Tax Law, 3(2), 1–27. Retrieved from