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Apportionment of tax revenue

Published on May 28, 2026   8 min

A selection of talks on Finance, Accounting & Economics

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0:00
My name is Kristoffer Berg, and I'm a lecturer at Trinity College, University of Cambridge. Today, I'll present the seventh lecture on business taxation.
0:12
Today, we are talking about formula apportionment. So I wanted to start with a quote that is related to formula apportionment. What the paper says is, "How should the tax base be allocated between these jurisdictions? There is no compelling answer to this question. To appreciate this, suppose that a product can only be produced in country S and is only valued by consumers in country D and the operation can only be financed by investors in country R. Worldwide profits would then be zero without an essential contribution from individuals located in each of these three countries. There is no sense in which we could state, for example, that 20% of the profits stem from the contribution of individuals in the residence country, 50% from the contribution of individuals in the source country, and 30% from the contribution of individuals in the destination country.
1:06
So given this quotation, it may sound like formula apportionment is difficult to do, to put it mildly. The question they are addressing is where are profits really created? Are profits created where production is happening, where the investors are, or where the goods are sold? Of course, this is not entirely clear. It may be impossible to determine for multinational corporations where the profits are actually created. The current corporate income tax system is in some way trying to answer part of this question in a very complicated way, especially by using these rules around transfer pricing that we were talking about earlier. Now, formula apportionment may sound like an idea about where profits are created. But in my view, a different interpretation of formula apportionment is that it is a more ad-hoc alternative that has certain benefits compared to the current system. So formula apportionment may turn out to be a partial solution to profit shifting and may, to some extent, also address tax competition. We discussed formula apportionment a little bit in an early lecture. So just to remind ourselves what we mean by formal apportionment, this is when a multinational corporation's total tax base, for example, the profits, are allocated based on certain factors about the firm. For example, where their workers are, where the capital is or where the sales are happening.

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