Vanderbilt Journal of Transnational Law

First Page



A complex and controversial aspect of state taxation of business income involves the attribution of a multinational corporation's (MNC's) net income. This Article examines the nature and scope of the controversy that stems from the conflicting views of states that promote a unitary taxation system, and MNCs as well as the Department of Treasury (Treasury) that oppose this position. Section IV illustrates why the unitary business principle is currently the only viable, fair, and feasible method available to the states for the geographical assignment of an MNC's net income. Section V analyzes the MNCs' arguments both against worldwide combined reporting and in favor of alternative accounting methods. In addition, this Article also considers the different positions of foreign and domestic MNCs in regard to worldwide combined income reporting.

Section II explores the basic assumptions upon which various attribution rules are based and sets forth the consequences of competing alternative rules. This section also examines the underlying conflict between: (1) the "sourcing" of net income and "separate accounting," subject to Internal Revenue Code (IRC) § 482 adjustments (as administered by the Internal Revenue Service (IRS)); and (2) the unitary business principle.

Substantial differences between the theory and application of these various rules have surfaced as states exert their individual powers of taxation within the limits of constitutional and practical restraints. As applied to MNCs, the appropriateness and reasonableness of any of these rules depend on one's view of what constitutes an MNC and a reasonable exercise of state taxing power. If an MNC is viewed as a single economic unit rather than as a group of independent businesses, then combined tax reporting is appropriate. When an MNC is viewed as a unitary economic entity, though, nationality becomes a consideration. An attribution rule that is reasonable when used to determine the domestic income of a foreign MNC is not necessarily appropriate as applied to a domestic MNC. Different attribution rules may be necessary for domestic MNCs with world operations head quartered in the United States, as compared with foreign MNCs headquartered in other nations. A discussion of concepts basic to these methods follows.