Editing Transfer pricing (section)

== Alternative approaches to profit allocation ==
A frequently-proposed<ref>OECD Guidelines 1.16-1.32</ref><ref>{{Cite journal|last=S.|first=Avi-Yonah, Reuven|date=2010-01-01|title=Between Formulary Apportionment and the OECD Guidelines: A Proposal for Reconciliation|journal=Articles|url=http://repository.law.umich.edu/articles/1181/|language=en}}</ref> alternative to arm's-length principle-based transfer pricing rules is [[formulary apportionment]], under which corporate profits are allocated according to objective metrics of activity such as sales, employees, or fixed assets. Some countries (including Canada and the United States) allocate taxing rights among their political subdivisions in this way, and it has recommended by the European Commission for use within the European Union.<ref>{{Cite journal|last=Krchniva|first=Katerina|year=2014|title=Comparison of European, Canadian and U.S. Formula Apportionment on Real Data|journal=Procedia Economics and Finance|volume=12|pages=309–318|doi=10.1016/S2212-5671(14)00350-5|doi-access=free}}</ref><ref>{{Cite web|url=http://europa.eu/rapid/press-release_MEMO-16-3488_en.htm|title=European Commission - PRESS RELEASES - Press release - Questions and Answers on the package of corporate tax reforms|website=europa.eu|language=en|access-date=2017-03-01}}</ref> According to the ''[[amicus curiae]]'' brief, filed by the attorneys general of Alaska, Montana, New Hampshire, and Oregon in support of the state of California in the [[U.S. Supreme Court]] case of ''Barclays Bank PLC v. Franchise Tax Board,'' the formulary apportionment method, which is also known as the unitary apportionment method, has at least three major advantages over the separate accounting system when applied to multi-jurisdictional businesses. First, the unitary method captures the added wealth and value resulting from economic interdependencies of multistate and multinational corporations through their functional integration, centralization of management, and [[economies of scale]]. A unitary business also benefits from more intangible values shared among its constituent parts, such as reputation, good will, customers and other business relationships. See, e.g., Mobil, 445 U.S. at 438–40; Container, 463 U.S. at 164–65.

Separate accounting, with its emphasis on carving out of the overall business only income from sources within a single state, ignores the value attributable to the integrated nature of the business. Yet, to a large degree, the wealth, power, and profits of the world's large multinational enterprises are attributable to the very fact that they are integrated, unitary businesses. Hellerstein Treatise, P8.03 at 8-32.n9 As one commentator has explained: To believe that multinational corporations do not maintain an advantage over independent corporations operating within a similar business sphere is to ignore the economic and political strength of the multinational giants. By attempting to treat those businesses which are in fact unitary as independent entities, separate accounting "operates in a universe of pretense; as in Alice in Wonderland, it turns reality into fancy and then pretends it is the real world".

Because countries impose different [[corporate tax|corporate tax rates]], a corporation that has a goal of minimizing the overall taxes to be paid will set transfer prices to allocate more of the worldwide profit to lower tax countries. Many countries attempt to impose penalties on corporations if the countries consider that they are being deprived of taxes on otherwise taxable profit. However, since the participating countries are sovereign entities, obtaining data and initiating meaningful actions to limit tax avoidance is hard.<ref>Ronen Palan (2010): The Offshore World: Sovereign markets, Virtual Places, and Nomad Millionaires; Cornell University Press, 2006.</ref> A publication of the [[Organisation for Economic Co-operation and Development]] (OECD) states, "Transfer prices are significant for both taxpayers and tax administrations because they determine in large part the income and expenses, and therefore taxable profits, of associated enterprises in different tax jurisdictions."<ref>{{cite web|url=http://www.keepeek.com/Digital-Asset-Management/oecd/taxation/oecd-transfer-pricing-guidelines-for-multinational-enterprises-and-tax-administrations-2010_tpg-2010-en#.WDT1m9UrKpo|title=Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations" at paragraph 12, hereinafter "OECD xx," where "xx" is the cited paragraph number.}}</ref>