Global profit split: An evolutionary approach to international income allocation

International taxation is concerned mainly with the equitable allocation of cross-border income between countries in which income-earning activities take place. Such allocation has traditionally been governed by the arm’s-length principle, which has been interpreted as requiring a comparable transactional pricing approach. This approach assumes that each member of a multinational enterprise (MNE) group is a separate entity and that the transactions between related parties can be separated and compared with arm’s-length transactions. It has, however, proved difficult to apply comparable transactional pricing to internationally integrated businesses, especially those involving intangibles and services, and formulary apportionment has been suggested as an alternative. Essentially, formulary apportionment treats the MNE group as a single economic entity. The group’s profit is allocated to members according to a formula that reflects the particular member’s contribution to the production of that profit. A rich academic literature exists which either defends or attacks this alternative approach. The OECD and national governments have rejected formulary apportionment mainly on the ground that it violates the arm’s-length principle. This article proposes a global profit split (GPS) method for allocating international income. The GPS would allocate the global profit of an integrated business to each country in accordance with the economic contributions made by components of the business located in that country. The allocation would be based on a formula that would reflect the economic factors that contribute to profit making. While the GPS draws on elements of the traditional formulary apportionment and profit split methods, it also differs from them. The author discusses in detail the key issues involved in designing the GPS. She also presents and evaluates the main policy and pragmatic justifications for the adoption of this innovative approach. The author argues that the GPS is not only theoretically and practically superior to traditional income allocation methods, but also consistent with the arm’s-length principle. On the basis of historical developments, interpretation of article 9 of the OECD model tax convention, and international tax policy considerations, the author establishes that the GPS is not a radical departure from the arm’s-length principle, but rather a natural development in its evolution. She concludes that the law of evolution ison the side of reform because the GPS would provide for a fair and effective allocation of income derived from globally integrated business activities.

Interjurisdictional allocation of multinational banking income : aligning taxation principles with economic activity

This thesis argues that one type of multinational entity – the multinational bank – poses particularly significant challenges to the international tax regime in terms of its current profit allocation rules. Multinational banks are a unique subset of multinational entities, and as a consequence of their unique traits, the traditional international tax regime foes not yield an optimal interjurisdictional allocation of taxing rights. The opportunity for tax minimisation, achievable because of the unique traits, and realised through exploitation of the traditional source and transfer pricing regime, results in a jurisdictional distribution of taxing rights which does not reflect economic reality. There are two distinct ways in which the traditional international tax regime fails to reflect economic activity. The first way that economic activity may not be reflected in the distribution of the taxing rights to income from multinational banking is through the application of traditional source rules. The traditional sources rules allocate income where transactions are completed rather than where the intermediation services are arranged. As a result of their unique commercial role as financial intermediaries, by separating intermediary economic activity from legal transactions with third parties, multinational banks may distort the true location of the activity giving rise to income. The second way in which the traditional tax regime may fail to reflect economic activity is through the traditional transfer pricing regime requiring related or internal transaction to be undertaken at an arm’s length price. The arm’s length pricing requirement is theoretically deficient in its failure to recognise the highly integrated nature of multinational banking. In practice, the arm’s length pricing requirement is also difficult, if not impossible, to apply to multinational banks because of the requirement of comparability. The difficulties associated with the current model have resulted in a subtle move by multinational banks towards global formulary apportionment. This thesis concludes that, for the international taxation of multinational banks, the current source regime should be replaced with a system that allocates profits for tax purposes on the basis of income source, with source determined using a unitary taxation or global formulary apportionment system. It is argued that global formulary apportionment is a theoretically superior model that provides both jurisdiction to tax and allocated profits on the basis of the economic activity that generates the income.

Influence of body mass index on prescribing costs and potential cost savings of a weight management programme in primary care

Objectives Prescribed medications represent a high and increasing proportion of UK health care funds. Our aim was to quantify the influence of body mass index (BMI) on prescribing costs, and then the potential savings attached to implementing a weight management intervention.

Methods Paper and computer-based medical records were reviewed for all drug prescriptions over an 18-month period for 3400 randomly selected adult patients (18–75 years) stratified by BMI, from 23 primary care practices in seven UK regions. Drug costs from the British National Formulary at the time of the review were used. Multivariate regression analysis was applied to estimate the cost for all drugs and the ‘top ten’ drugs at each BMI point. This allowed the total and attributable prescribing costs to be estimated at any BMI. Weight loss outcomes achieved in a weight management programme (Counterweight) were used to model potential effects of weight change on drug costs. Anticipated savings were then compared with the cost programme delivery. Analysis was carried out on patients with follow-up data at 12 and 24 months as well as on an intention-to-treat basis. Outcomes from Counterweight were based on the observed lost to follow-up rate of 50%, and the assumption that those patients would continue a generally observed weight gain of 1 kg per year from baseline.

Results The minimum annual cost of all drug prescriptions at BMI 20 kg/m2 was £50.71 for men and £62.59 for women. Costs were greater by £5.27 (men) and £4.20 (women) for each unit increase in BMI, to a BMI of 25 (men £77.04, women £78.91), then by £7.78 and £5.53, respectively, to BMI 30 (men £115.93 women £111.23), then by £8.27 and £4.95 to BMI 40 (men £198.66, women £160.73). The relationship between increasing BMI and costs for the top ten drugs was more pronounced. Minimum costs were at a BMI of 20 (men £8.45, women £7.80), substantially greater at BMI 30 (men £23.98, women £16.72) and highest at BMI 40 (men £63.59, women £27.16). Attributable cost of overweight and obesity accounted for 23% of spending on all drugs with 16% attributable to obesity. The cost of the programme was estimated to be approximately £60 per patient entered. Modelling weight reductions achieved by the Counterweight weight management programme would potentially reduce prescribing costs by £6.35 (men) and £3.75 (women) or around 8% of programme costs at one year, and by £12.58 and £8.70, respectively, or 18% of programme costs after two years of intervention. Potential savings would be increased to around 22% of the cost of the programme at year one with full patient retention and follow-up.

Conclusion Drug prescriptions rise from a minimum at BMI of 20 kg/m2 and steeply above BMI 30 kg/m2. An effective weight management programme in primary care could potentially reduce prescription costs and lead to substantial cost avoidance, such that at least 8% of the programme delivery cost would be recouped from prescribing savings alone in the first year.