Global profit split: An evolutionary approach to international income allocation

Li, Jinyan 2002, Global profit split: An evolutionary approach to international income allocation, Canadian Tax Journal, vol. 50, no. 3, pp. 823-883.

Attached Files
Name Description MIMEType Size Downloads

Title Global profit split: An evolutionary approach to international income allocation
Author(s) Li, Jinyan
Journal name Canadian Tax Journal
Volume number 50
Issue number 3
Start page 823
End page 883
Publisher Canadian Tax Foundation
Place of publication Toronto, ON
Publication date 2002
ISSN 0008-5111
Keyword(s) Transfer pricing
International taxation
Profit spltting
Summary International taxation is concerned mainly with the equitable allocation of cross-border income between countries in which income-earning activities take place. Such allocation has traditionally been governed by the arm’s-length principle, which has been interpreted as requiring a comparable transactional pricing approach. This approach assumes that each member of a multinational enterprise (MNE) group is a separate entity and that the transactions between related parties can be separated and compared with arm’s-length transactions. It has, however, proved difficult to apply comparable transactional pricing to internationally integrated businesses, especially those involving intangibles and services, and formulary apportionment has been suggested as an alternative. Essentially, formulary apportionment treats the MNE group as a single economic entity. The group’s profit is allocated to members according to a formula that reflects the particular member’s contribution to the production of that profit. A rich academic literature exists which either defends or attacks this alternative approach. The OECD and national governments have rejected formulary apportionment mainly on the ground that it violates the arm’s-length principle. This article proposes a global profit split (GPS) method for allocating international income. The GPS would allocate the global profit of an integrated business to each country in accordance with the economic contributions made by components of the business located in that country. The allocation would be based on a formula that would reflect the economic factors that contribute to profit making. While the GPS draws on elements of the traditional formulary apportionment and profit split methods, it also differs from them. The author discusses in detail the key issues involved in designing the GPS. She also presents and evaluates the main policy and pragmatic justifications for the adoption of this innovative approach. The author argues that the GPS is not only theoretically and practically superior to traditional income allocation methods, but also consistent with the arm’s-length principle. On the basis of historical developments, interpretation of article 9 of the OECD model tax convention, and international tax policy considerations, the author establishes that the GPS is not a radical departure from the arm’s-length principle, but rather a natural development in its evolution. She concludes that the law of evolution ison the side of reform because the GPS would provide for a fair and effective allocation of income derived from globally integrated business activities.
Language eng
Field of Research 180125 Taxation Law
HERDC Research category C1 Refereed article in a scholarly journal
Persistent URL

Document type: Journal Article
Collections: Faculty of Business and Law
Connect to link resolver
Unless expressly stated otherwise, the copyright for items in DRO is owned by the author, with all rights reserved.

Version Filter Type
Citation counts: TR Web of Science Citation Count  Cited 0 times in TR Web of Science
Scopus Citation Count Cited 0 times in Scopus
Google Scholar Search Google Scholar
Access Statistics: 782 Abstract Views, 1 File Downloads  -  Detailed Statistics
Created: Mon, 07 Jul 2008, 08:07:35 EST

Every reasonable effort has been made to ensure that permission has been obtained for items included in DRO. If you believe that your rights have been infringed by this repository, please contact