Considerations about under-taxation were also deferred when opting
for separate entity accounting on the basis of the ALS. In principle there
are three methods for taxing MNEs. First, transnational economic activity
could be taxed internationally – governments would agree on a common
tax base, a common tax rate and a common system of tax administration.
An international business tax would imply the delegation of taxation
power to an international authority. A second option would be the one
that has actually emerged. This solution lies at the other end of the spectrum;
it is sovereignty-preserving. Third, there is also an intermediate
option: MNEs could be subjected to unitary taxation with formula apportionment
(UT+FA). An MNE’s profit is determined through a combined
report and then allocated to each part of the enterprise on the basis of
a predetermined formula. The formula should reflect the true economic
contributions of each branch, e.g. by referring to factors such as property,
sales and payroll. This system would require governments to share their
sovereigntywith respect to the definition of the tax base but it would leave
them free to apply their own preferred tax rate. UT+FA is seen by most tax
experts as a way to curb profit shifting from high-tax to low-tax countries
(Arnold and McIntyre, 1995: 66–67).