Formulary apportionment, also known as unitary taxation, is a method of splitting the total pre-tax profit earned (or loss incurred) by a multinational between the tax jurisdictions where it does business.
[2] However, trade between the United States and Canada is not covered, thus requiring transfer prices, leading to increased compliance costs for the corporation.
Worldwide unitary combined reporting was first approved by the US Supreme Court in 1983 in Container Corp. v. Franchise Tax Board (CA) by a vote of 5-3 (Justice Stevens did not participate).
However, as a result of foreign retaliatory legislation and pressure from the federal government, all states have now abandoned mandatory worldwide combined reporting.
[1] Out of the forty-four states (plus one more jurisdiction, the District of Columbia) which imposed a corporate income tax in 1978, all but Iowa used the Massachusetts Formula.
[9] In 2007, it was suggested that the US Internal Revenue Service use formulary apportionment (actually a hybrid approach: routine return plus residual profit split) in the assessment of federal corporate income tax, believing it would lead to increased tax revenue in the face of a trend for multinational corporations to use transfer pricing to shift profits out of the US into low-tax countries.
[3] The UK-US double taxation treaty signed in 1975 included a provision to prohibit US states from "tak[ing] into account the income, deductions, receipts, or out-goings of a related enterprise" in the United Kingdom or any other country for the purpose of determining tax liability.
[12] The Supreme Court explicitly held worldwide formulary apportionment as constitutional in separate cases in 1983 and 1994 (Barclays Bank PLC v. Franchise Tax Board).