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Is Unilateral Formulary Apportionment Better than the Status Quo?

It’s doubtful that the world’s large-economy countries will adopt formulary apportionment in a coordinated movement that yields a uniform regime. The more likely scenario is that a formulary apportionment adopter will be a unilateral actor winding up with a system that does not mesh well with the systems of its major trading partners. 
 
This paper points out that formulary apportionment does not require adoption of a territorial system. Formulary apportionment can be used in a worldwide regime to identify foreign-source income for foreign tax credit purposes. Thus, the unilateral adoption issue, with its uncoordinated results, is relevant even for countries that contemplate maintaining some form of worldwide taxation with a limited foreign tax credit. 
 
This paper’s principal purpose is to examine and evaluate the factors that any country must consider when contemplating replacement of the arm’s-length approach with formulary apportionment. Among those factors are: 
 
1. Will incentives to shift business activity and/or profits to low-tax foreign countries increase or decrease? 
 
2. Will double taxation and/or double non-taxation increase or decrease? 
 
3. Will systemic complexity increase or decrease? 
 
4. What will be the costs of renegotiating the unilateral actor’s income tax treaties to permit replacement of the arm’s length approach with formulary apportionment? 
 
5. Can the treaty mutual agreement procedure operate successfully when the unilateral actor has treaty partners that continue to employ the arm’s-length approach? If not, what is the cost? 
 
This factor analysis does not yield a uniformly applicable answer to the question of whether a country will be better off if it unilaterally adopts formulary apportionment. Instead rigorous cost/benefit analysis must be performed in light of the subject country’s particular situation.