Residual profit splitting: a theory-based approach to tax multinationals

Wolfram F. Richter ()
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Wolfram F. Richter: TU Dortmund University

International Tax and Public Finance, 2025, vol. 32, issue 3, No 2, 659-679

Abstract: Abstract About 140 countries have agreed to reallocate the rights to tax international corporate profits and to introduce minimum tax rates. The agreed plan is the product of pragmatism and a search for consensus, but ambitious. It requires far-reaching system changes such as a move towards unitary profit taxation, better known as formula apportionment. The formulary apportionment of profit earned by a multinational enterprise (MNE) assumes international agreement on common rules for the determination of taxable profit. This is a critical departure from the well-established tradition of separate entity accounting (SEA) and may still turn out to be a serious design flaw of the reform. This paper argues for a reform that retains SEA and addresses the flaws in the current system of corporate taxation at their root rather than merely fixing symptoms. To this end, a reform aimed specifically at the rules governing the taxation of intangible assets is recommended. The proposed system can be interpreted as a theory-based generalization of the withholding tax solution of Article 12B of the UN Model Tax Convention to cases where an MNE maintains a physical presence in the source country or intra-group supplies of goods and services entail allocable costs.

Keywords: OECD/G20 BEPS Project; Formula apportionment; Separate entity accounting; Shapley assignment of taxing rights; Residual profit allocation/splitting (search for similar items in EconPapers)
JEL-codes: F23 H25 M48 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s10797-024-09848-7

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