Debunking Claims Regarding the Shortcomings of the Arm’s Length Standard

16 Pages Posted: 19 May 2020

Date Written: April 22, 2020


The taxation of the digital economy is confronting tax and transfer pricing professionals with fundamental challenges. While an intense debate on the concept of value creation for transfer pricing is required to address these challenges, the prevailing political pressures stifle this debate. In 2020 the OECD has published final reform proposals (so-called Pillar 1) that would drastically change the existing international regulatory framework, by introducing elements of formulary apportionment. This development reflects an eroding consensus on the prevailing transfer pricing paradigm, the so-called arm’s length principle.

In this working paper I analyze how unjustified claims regarding alleged shortcomings of the arm’s length principles contribute to these developments. Specifically, I will debunk five respective popular claims directed against the arm's length principle. The focal point of the analysis is a recent paper published by Arthur J. Cockfield.

The objective of this working paper is not to present a coherent argument on the conceptual advantages of the arm’s length principle vis-à-vis global formulary apportionment. The objective is rather to facilitate a discussion on reforms for taxing the digital economy that is not framed by myths about tax avoidance and respective scapegoating of the arm’s length principle.

Keywords: arm's length principle, transfer pricing, taxation of digital economy, formulary apportionment

JEL Classification: K34, M48, F53, F55, F69

Suggested Citation

Treidler, Oliver, Debunking Claims Regarding the Shortcomings of the Arm’s Length Standard (April 22, 2020). Available at SSRN: or

Oliver Treidler (Contact Author)

TP&C ( email )

Ravensberger StraB2 14
Berlin, 10709

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