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Unitary taxation


A system of taxing firms operating in several countries on the basis of a country’s share in their total operations. If taxation of a multinational firm operating in a country is based purely on its profits made in that country, tax can be avoided by accounting procedures. Measures to shift apparent profits out of the country include transfer pricing, that is, overvaluing purchases hy branches of the firm from its branches in other countries, or undervaluing sales to them. Under unitary taxation a multinational firm is taxed on the basis of its worldwide profits multiplied by some measure of the proportion of its operations carried out in a country; such a measure could be employment or turnover. The adoption of unitary taxation would require changes in double taxation agreements.

Reference: Oxford Press Dictonary of Economics, 5th edt.