Defending the Arm’s Length Principle: A contemporary appraisal of the arm’s length principle as the allocation rule for the transfer pricing of intangibles to solve the base erosion and profit shifting (BEPS) problem

Abstract

The arm’s length principle has been the allocation rule for income between associated enterprises for the better part of the last century. However, in view of the Base Erosion and Profit Shifting (BEPS) policy agenda and challenges arising from the taxation of the digital economy, its relevance is increasingly being questioned. The thesis examines the arm's length principle through the lens of intangible assets, which raise complex and difficult valuation issues in contemporary business models. It argues that the current application of the arm’s length principle is not consistent with the business realities of how multinational enterprises (“MNEs”) transact, which is identified as a cause of BEPS. The thesis advocates reforms to the interpretation of the arm’s length principle based on the economic characteristics of intangible assets and the organisational practices of modern MNEs. It also provides policy recommendations in support of these reforms. The thesis provides justification for the measures it proposes through case studies concerning intangible investment, as well as analysis of specific supply-chains, including digital business models, which provide the greatest challenges for the arm’s length principle.