Will high paying jobs go abroad? Labour shifting responses to formulary allocation

International tax experts commonly acknowledged that income shifting generates excessive tax revenue losses as well as compliance and administrative costs. This is especially true with respect to income generated from difficult-to-place assets such as intangibles, which are typically allocated by profit split transfer pricing methods. This article argues that the income allocated from certain types of intangibles should be allocated by a cost of labour formula, and further demonstrates that such a shift would not result in tax-induced labour shifting. This solution is simple to implement and reduces the costs of income shifting without requiring radical reform. The article also uses theoretical and empirical analyses to illustrate a novel point: that the location of the cost of labour deduction operates as a friction that limits income shifting tax planning. While the empirical analyses use data from US companies, as the most detailed data available concerns US multinationals (MNEs), the results can be extrapolated to apply equally to MNEs in other jurisdictions. Most of the literature about income shifting considers only unitary alternatives to the current transfer pricing regime and fails to consider the option of applying formulary allocation only with respect to a portion of a MNE's income. However, as the article points out, the implications of using this more constrained, yet realistic alternative are radically different than those of the unitary regime and policymakers should take advantage of these differences. [ABSTRACT FROM AUTHOR]