Corporate tax payments under formulary apportionment: Evidence from the financial reports of 50 major U.S. multinational firms

Under a formulary apportionment system of taxing multinational corporate income, U.S. tax liabilities would be based on the product of a multinational firm's worldwide income and the fraction of their real activities that occur in the United States – typically, an average of asset, payroll, and sales shares. This analysis utilizes financial reporting data for 50 large U.S. multinational firms to analyze how tax payments would change under a possible formulary system, updating Shackelford and Slemrod (1998). Our time period is 2005–2007 instead of 1989–1993. We find that tax payments under formulary apportionment would increase modestly overall but by a lower magnitude than found by Shackelford and Slemrod. Given the changes in the international tax environment since the earlier time period, this is a puzzling finding; we speculate regarding possible explanations.

► We consider the effects of a possible formulary system of taxing U.S. multinational firms during 2005–2007. ► We calculate the revenue consequences of formulary apportionment for 50 large U.S. multinational firms. ► For these 50 firms, corporate tax revenues would increase modestly, by about 22% in 2007. ► The surprisingly small effect of formulary apportionment on revenues is likely due to the use of financial rather than tax data.