Separate accounting or unitary apportionment?

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The implications of globalization on income taxation for multinational enterprises are profound, particularly regarding the separate accounting method, which has been the standard since the 1930s. This method faces scrutiny due to concerns about tax revenue erosion from transfer price manipulations. Recent discussions, notably spurred by the European Commission’s study on company taxation, have questioned the adequacy of separate accounting and proposed unitary apportionment as an alternative within the EU. This treatise examines both taxation concepts, assessing them qualitatively and quantitatively in light of the economic rationale of multinational enterprises, their income generation, and internal management. A key focus is a general equilibrium model of firm behavior under unitary apportionment, which offers a more comprehensive analysis than the typical partial equilibrium approach. This model provides valuable insights into tax incidence and economic distortions associated with unitary apportionment. Ultimately, it equips policymakers and tax authorities with the tools to estimate potential changes in tax revenues should separate accounting be replaced by unitary apportionment in the future.