Document Type



Taxation-Transnational | Tax Law


In this article, Professor Pomp argues that the OECD should look to the American states for insight into taxing cross-jurisdictional corporations. In the early 20th century, the states had to respond to the challenge of taxing domestic interstate corporations. While these corporations posed no tax problem at the federal level, states had to respond to the reality of corporations shifting profits into neighboring tax havens. They needed a better alternative to federal transfer pricing and sourcing rules. In the 1930’s, some states began combining domestic related entities.

The growth of multinational corporations created new problems for both the states and the federal government. Some states continued to not only to combine domestic corporations, but also multinationals as well: an approach known as worldwide combined reporting. Political pressure, not administrative obstacles, eventually pushed these states back to a waters edge approach.

The states can shed light on the challenge of assigning the tax base between separate production and market countries. In 1957, the Uniform Law Commission adopted the Uniform Division of Income for Tax Purposes Act (UDITPA). UDITPA adopts an evenly weighted three-factor formula, using property, payroll, and sales. States have moved away from this fomula and instead have been using a single-factor sales formula, with market-based approaches to the sales factor. The MTC has developed different approaches to market based sourcing that reflect the type of transaction involved and include special formulas for special industries.

The OECD can look to the states for insight into economic nexus rules as well. The MTC incorporated economic nexus approaches into its “factor presence” rules for nexus.

Mandatory worldwide reporting provides many advantages over the OECD’s agenda: the approach effectively deals with tax havens, transfer pricing, defining specific types of businesses, profit shifting, and the allocation of overhead. And unlike the states, the OECD does not need to worry about accommodating the United States Commerce Clause.

The article acknowledges that the MTC and UDITPA do not shed light on the composition of the tax base to be combined. Pomp suggests looking to international accounting standards and the Common Consolidated Corporate Tax Base as starting points.

Finally, many countries will require help administering worldwide combined reporting. Pomp suggests that a nongovernmental organization take on the burden for all countries. Possible candidates include the OECD, the U.N., the IMF, or the World Bank.