Towards an Amended Arm’s Length Principle – Tackling Complexity and Implementing Destination Rules in Transfer Pricing

34 Pages Posted: 19 Jul 2022 Last revised: 6 Dec 2022

See all articles by Stefan Greil

Stefan Greil

German Federal Ministry of Finance

Michael Overesch

Universität zu Köln

Anna Rohlfing-Bastian

Goethe University Frankfurt

Ulrich Schreiber

University of Mannheim - Department of Business Administration and Taxation; Centre for European Economic Research (ZEW)

Caren Sureth-Sloane

Paderborn University; Vienna University of Economics and Business; TRR 266 Accounting for Transparency

Date Written: November 30, 2022

Abstract

The arm’s length principle (ALP) is the cornerstone of multinational enterprises’ (MNEs) profit taxation. However, despite extensive improvements by the OECD’s Base Erosion and Profit Shifting (BEPS) Project, two aspects of the ALP has been widely criticized. First, market jurisdictions where multinational enterprises serve their customers have little access to the MNEs’ profits because there is often no place of supply for tax purposes or, if there is, the profits reported there are very low. This reduces the perceived fairness of profit allocations and the acceptance of rules by taxpayers and jurisdictions. Second, the rules governing the ALP have continuously become more complex and difficult to implement. Whereas the first point of criticism will presumably be addressed by Pillar One, the second has not yet been dealt with and is even more exacerbated by the BEPS Project. The authors suggest amending the ALP by attempting to effectively focus on its complexity and implementing destination rules. The former can be achieved with a reduction of functional analyses and information requirements as well as a standardization of margins reduces complexity while the latter target the allocation of MNEs’ profits to market jurisdictions which they have in common with Pillar One. However, in contrast to Pillar One that rests on a multilateral agreement, the amended ALP is embedded in a bilateral context (usually a double tax agreement and underlying transfer pricing guidelines). Keeping the bilateral character significantly reduces conflicts of interest between jurisdictions, simplifies tax enforcement, and offers important benefits for dispute resolution. This is assumed to increase the perceived fairness of profit allocations and acceptance of the ALP. A stylized example is used to demonstrate how the amended ALP can be applied.

Keywords: Arm's Length Principle, Transfer Pricing, International Taxation, OECD BEPS Project

Suggested Citation

Greil, Stefan and Overesch, Michael and Rohlfing-Bastian, Anna and Schreiber, Ulrich and Sureth-Sloane, Caren, Towards an Amended Arm’s Length Principle – Tackling Complexity and Implementing Destination Rules in Transfer Pricing (November 30, 2022). TRR 266 Accounting for Transparency Working Paper Series No. 89, WU International Taxation Research Paper Series No. 2022-10, Available at SSRN: https://ssrn.com/abstract=4166972 or http://dx.doi.org/10.2139/ssrn.4166972

Stefan Greil (Contact Author)

German Federal Ministry of Finance

Wilhelmstrasse 97
Berlin, 10117
Germany

Michael Overesch

Universität zu Köln ( email )

Albertus-Magnus-Platz
WiSo-Gebäude
Cologne, 50923
Germany
0221/470-5605 (Phone)

HOME PAGE: http://www.steuer.uni-koeln.de/

Anna Rohlfing-Bastian

Goethe University Frankfurt

Theodor-W.-Adorno-Platz 4
Frankfurt am Main, 60629
Germany

Ulrich Schreiber

University of Mannheim - Department of Business Administration and Taxation ( email )

D-68131 Mannheim
Germany
+49 621 181 1718 (Phone)
+49 621 181 1716 (Fax)

Centre for European Economic Research (ZEW)

D-68161 Mannheim
Germany

Caren Sureth-Sloane

Paderborn University ( email )

Warburger Str. 100
Paderborn, 33098
Germany

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

TRR 266 Accounting for Transparency ( email )

Warburger Straße 100
Paderborn, 33098
Germany

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