Peter A. Barnes recently spoke at a roundtable discussion on the use of separate entity accounting versus global formulary apportionment when taxing global income. Practitioners also discussed the consequences associated with using a state model at the international level. For the complete article, please visit Worldwide Tax Daily's website (subscription required).
Excerpt taken from the article.
At the international level, two methods are being debated -- separate entity accounting and the arm's-length principle, and global formulary apportionment -- but it is unrealistic that either one is the answer, said Peter Barnes of Caplin & Drysdale.
Despite the flaws associated with the arm's-length standard, global formulary apportionment cannot be used to apply the same apportionment percentage when profit levels between countries differ considerably more than between states, Barnes said.
Barnes said the debate should center on where within separate entity accounting and the arm's-length standard there are instances in which formulary apportionment is appropriate. For example, among the transfer pricing methods is the profit-split method, which has been applied, at least in part, to advance pricing agreements to allocate income at arm's length, he said.
"That is very different from the notional idea that we are just going to throw the company all together and then split up its profits around the world," Barnes said.
Huddleston acknowledged that there are problems with combined reporting and apportionment, but he said that the states have been dealing with them for decades and have built rules that work.
Barnes responded that uniformity is not completely necessary, but that the wider variations in tax rules and rates internationally make the stakes higher than they are among the states.
"I don't pretend that we are ever going to have a global system that works right for everyone," said Barnes. "You can have a variety of countries go with separate entity and combined reporting and we'll learn to live with it, but boy, talk about complexity."
Barnes said that the way to deal with aggressive international tax planning is "a menu." He suggested more transaction taxes, but added that comparing the U.S. tax system to those of other jurisdictions is comparing apples and oranges because of the lack of a VAT in the United States.
For the U.S., part of the solution would be adopting a VAT, Barnes said. Beyond that, he suggested that transfer pricing could be improved with better enforcement and the use of "simplified methods and safe harbors."