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Transfer Pricing; Unitary systems, Formulary sourcing, Multinational Enterprises, Financial Institutions, OECD, Earnings-Stripping; Thin-Capitalization; Financial Assets

Subject Categories

Law | Tax Law


The taxation of the income derived from financial assets and transactions was always a daunting black hole in the income tax regime. In an integrated global market, tax authorities find it hard to tax financial income because of the high demand for financial investments and the mobility, fungibility, and tax-sensitivity of financial assets. Many of the current approaches to solving international tax allocation problems fail to see that financial transactions present special challenges and therefore their allocation treatment requires a special solution. The Article focuses on the most conceptually intriguing and significant problem associated with the allocation of financial income: related party income shifting. This Article argues that because it is difficult to determine the comparable market benchmark with regard to affiliated financial transactions, tax authorities should abandon the arm's length standard in favor of a more unitary-formulary allocation solution when trying to source these transactions. The Article develops a unitary solution that allocates the financial income of multinational financial institutions. In doing so, it assumes an ideal reality in which a multilateral unitary agreement can easily be struck and in which there are no complex corporate structures. The justification for assuming this ideal reality is that in the context of multinational financial institutions, it is not so difficult to attain given the relatively small number of countries from where these institutions run the bulk of their operations and the unique ownership patterns of the financial industry. The Article then evaluates the unitary solution proposal, and concludes that it offers a superior alternative to the current tax treatment of multinational financial institutions. It therefore argues that tax policymakers should consider it as a relevant non-utopian alternative to current practices. On the more theoretical level, it argues that there are good policy reasons, and readiness among tax policymakers around the world, to use formulary allocation methods to allocate the income proceeds of financial income. The Article should therefore be seen as opening a broader debate on how formulary methods should be used to source income derived from mobile assets. Accordingly, it develops a necessary theoretical framework for a subsequent article that extends its current proposal to multinational enterprises that are not financial institutions, and that operate in a non-ideal reality.

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Tax Law Commons