Unitary Taxation, sometimes called Formulary Apportionment, is a method of calculating how much tax a company should pay in a specific jurisdiction (either a State or a Country), when their operations and profits span multiple jurisdictions. It is the method used in America to calculate how much state tax a company should pay when the company operates in more than one state. The basic principle is to try and approximate what percentage of a company’s profits come from a particular area. To do this it uses something called the Massachusetts formula, which says:
What percentage of the total company workforce is in that area?
What percentage of the total company assets are in that area?
What percentage of the total company sales are in that area?
Those three percentages are then averaged, and it is assumed that that is the percentage of the total company profits that are attributable to that area. That percentage is applied to total group profits and taxed accordingly.
A company makes worldwide profits of £50m.
15% of its workforce is in the UK.
20% of its assets are in the UK.
25% of its sales are in the UK.
The average of these three is 20% so it is assumed that 20% of its profits come from its UK operations. Therefore UK profits are taken to be 20% of £50m = £10m and taxed appropriately.
Very simple, very easy to implement, and completely resisted by all multinational companies as it makes it impossible for them to avoid tax by Transfer Pricing.
It’s worth noting that for this to work all the figures from a company’s subsidiaries have to be added together, to stop them ‘hiding’ profits anywhere (hence the term Unitary Taxation), and companies have to report separate figures for each country, a process called ‘Country by Country Reporting’.