The OECD mandated system of taxation for multinational corporations assumes each company within a multinational corporation is an entirely separate and distinct legal entity that can determine its tax affairs entirely independently of all other companies in the same group. Unitary taxation instead assumes all the companies in a group are a single entity for tax purposes.
Unitary taxation treats the income of a group of companies as being one combined sum subject to tax that is then apportioned to a country for tax to be assessed by applying a formula to determine where it might best be considered to have been earned (hence the term ‘formulary apportionment’ is widely applied to this process). Each state may then apply the rate of tax to it that it wishes. Unitary taxation is an alternative to the residence and source bases of taxation implicit in the OECD appraoch to corporate taxation.
Unitary taxation has been used in federal countries such as the USA where an allocation formula based on a ratio of sales, employment costs and assets employed within each state is used. It has been opposed by tax authorities (and MNCs) because they consider that it would be too difficult to reach international agreement, most especially on the formula. However, taxation of highly integrated MNCs may in practice already entail a formula-based allocation of profits, albeit through negotiation of the sums allocated to each state under the arm’s length method of transfer pricing for which there is frequently no realistic basis for determination because of the absence of alternative market based evidence of third party pricing.
Also known as
Formula apportionment taxation, unitary formula apportionment taxation
Tax us if you can, The Tax Justice Network, 2012. Written by Richard Murphy and John Christensen
Alternative OECD definition
Under a unitary tax system, the profits of the various branches of an enterprise or the various corporations of a group are calculated as if the entire group is a unity. A formula is used to apportion the net income of the whole group to the various parts of the group. Usually a combination of property, payroll, turnover, capital invested, manufacturing costs, etc. are formula factors. (Source: here)