Unitary Taxation with a Global Formulary Approach as a Realistic and Appropriate Option for Developing Nations: A Chinese Case Study


  • Sadiq Kerrie


China’s transfer pricing regime and investigations into transfer pricing
issues gained momentum in the late 1990s. Since then, China has indicated that it
is of the view that because of its developing country status, with its unique
economic and geographic factors, it faces a number of difficult challenges
including a lack of appropriate comparables, quantification and allocation of
location-specific advantages, and identification and valuation of intangibles. In the
United Nations Practical Manual on Transfer Pricing, China highlights and
expands its view on each of these challenges and of the four countries with
commentary in Chapter 10, provides the most comprehensive discussion on the
unique issues faced by developing and emerging economies. Interestingly, China
goes so far as to mention formulary apportionment as a possible solution to the
difficulties it faces in applying the arm’s length principle. Consistent with the
concerns expressed by China, this article proposes that unitary taxation based on
formulary apportionment should be considered as a more accurate method of
determining China’s ‘fair share’ of profits to be taxed. There is already evidence
that the current jurisdiction and allocation rules do not work for multinational
entities and China has clearly expressed concern about the application of the
current transfer pricing rules. As such, acceptance of an alternative model
proposed as superior for multinational entities may not be as onerous as previously
thought. To demonstrate this proposition the article establishes that a unitary
taxation approach which reflects economic reality and is theoretically superior
would, from a practical perspective, more easily and effectively ensure that the
profits of multinational entities are taxed in the jurisdictions which give rise to
those profits. In doing so, the article examines the commentary provided by China
in the UN Practical Manual and compares that to Brazil, India and South Africa. It
then considers the practicalities of the implementation of unitary taxation for
developing nations in terms of the key components of such a regime arguing that it
is a viable alternative to the current regime.

Author Biography

Sadiq Kerrie

Professor Kerrie Sadiq, Queensland University of Technology Business School. The author wishes to thank
the International Centre for Tax and Development (ICTD), supported by the UK Government’s Department for
International Development (DFID) and the Norwegian Agency for Development Cooperation (NORAD) for
the funding provided to undertake this project and present the paper at the Conference of Chinese Tax and
Policy 2014, Xiamen, China.