The Arm’s Length Principle in the 21st Century – Alive and Kicking?

Abstract

The international tax system faces substantial challenges with respect to taxing profits of multinational enterprises. Policymakers have put the focus on the taxation of the digital economy. The aim of this article is to provide a comprehensive overview over the ALP and the allocation of taxing rights of business profits, the concept of value creation, the impact of digitization on the allocation of taxing rights and the current discussions regarding this topic. Finally, I make a connection between the value creation concept and the challenges of digitization and asked the question if ALP is fit for purpose. It is intended to refocus on the proper application of the ALP in the 21st century as the re-thinking exercise is more demanding and requires more work than what has been published so far. By doing this exercise, I also provide food for thought which could be further explored to enhance the current international tax system.

Keywords: Arm’s Length Principle, Digital Economy, Transfer Pricing

JEL Classification: F00, H20, K34