Unitary Tax System (UTS) Definition
Unitary tax system is a taxation approach whereby the income of profits (and losses) of different branches of a corporation are calculated under one group. Unitary tax system is also called Formulary apportionment, under this system, all the profits and losses of different groups of the same corporation are allocated to a specific tax jurisdiction which the corporation is accountable for.
Unlike separate entity accounting, where each branch or subsidiary of a corporation are accounted for separately, the Unitary taxation approach apportion the net income and loss of the whole group to its branches. Using a formula and allocation criteria, the corporation’s total profit (or loss) are attributed to each jurisdiction.
A Little More on What is the Unitary Tax System
Separate entity accounting cannot do without transfer pricing, this taxation method uses the arms length standard in calculating or allocating profit (loss) to each entity. In contrast, the formulary apportionment or unitary taxation uses a combined reporting method in the allocation of earned (or loss incurred) by a corporation. This method views a corporation and all of its entities as a single entity, this is referred to s unitary combination.
The Unitary Tax System counters the separate entity accounting method and transfer pricing approaches. Many states in the United States have adopted the formulary apportionment which uses combined reporting. However, only U.S domestic corporations are covered by this system and not foreign business corporations.
Generally, combined reporting is needed where there is a level of interdependence among related entities. Countries like Canada and the United States adopt formulary apportionment method for domestic taxation purposes. This method helps these countries apportion income (profit earned as well as losses incurred) by/of corporations between their various jurisdictions or entities.
Combined reporting can assume either of these forms; worldwide unitary combined reporting and water’s edge combined reporting. The former deal with worldwide entities while the latter includes only income from U.S. affiliates.
In the United States for example, taxation is apportioned based on the unitary combination of a corporation and all its entities (both domestic and worldwide entities). Worldwide unitary combined reporting for the approval of the US Supreme Court in 1983 and it has been used overtime by many states in the U. S.
The Organisation for Economic Co-operation and Development (OECD) and other bodies have continuously debate the non – usage of formulary apportionment in international taxation. In the 1970s, there was intense advocacy for the adoption of formulary apportionment in attributing profits and losses incurred within national tax jurisdictions.
The adoption of this method in the European Union was proposed in 2000 by Joann Weiner and Charles E. McLure Jr and this was followed by an advocacy for the use of formulary apportionment by EU in 2001. Although, quite a number of suggestions supporting its usage were not adopted but some states allowed worldwide unitary combination to thrive but did not mandate it. States in the US and Canada applied worldwide unitary taxation.
Despite its usefulness in many states, there are certain criticisms against unitary tax system otherwise called Formulary attribution. One of the major criticisms is that because formulary apportionment treats many entities of a corporation as one, compliance costs are reduced. In contrast to this method is transfer pricing that increase compliance cost.
References for Unitary Tax System
Academic Research on Unitary Tax System (UTS)
After New Federalism, What?, Beam, D. R. (1985). Policy Studies Journal, 13(3), 584-590.
Structural reform, revenue adequacy and optimal tax assignment in local government, Robotti, L., & Dollery, B. (2009). Commonwealth Journal of Local Governance, (3), 51-67.
Land value taxation: Opportunity and challenges for funding regional Australia and New Zealand, Mangioni, V. (2018). Australasian Journal of Regional Studies, The, 24(2), 191.
Unitary or unified taxonomy?, Scoble, M. J. (2004). Philosophical Transactions of the Royal Society of London B: Biological Sciences, 359(1444), 699-710.
CHINA´ S FISCAL DECENTRALIZATION: CONSEQUENCES FOR THE PROMOTION OF LOCAL DEVELOPMENT, García, B. C. (2015).México y la Cuenca del Pacífico, (31).
Holding India together: The role of institutions of federalism, Singh, N. (2017).
State finances in India: A case for systemic reform, Singh, N. (2006).
State Tax Trends: A Roundtable Discussion, Cronin, J. J., Chumley, L. L., Dennen, S., & Duncan, H. T. (2009). Tax Mag., 87, 9.
International Roundtable on Metropolitan Governance-Summary Paper, Sansom, G. (2011). Governance-Summary Paper.
Fiscal Decentralization and Rural Development in India, Alam, T. (2009). (Doctoral dissertation, Aligarh Muslim University).