Standard Arm’s Length – w niewoli dogmatu
Arm’s length principle: In bondage to dogma

Summary/Abstract: It will be soon one hundred years since the arm’s length principle (ALP) was introduced. During the past century, the standard has become one of the foundations of the international tax order. Furthermore, the whole transfer pricing system is built around it. This article discusses the ALP’s key features and explains why it gained the dominant position in transfer pricing regulations despite its serious weaknesses. An alternative exists, called formulary apportionment, whose mechanism is based on profit allocation. The article’s thesis is that, due to changes resulting from globalisation and digitalisation of the economy, the arm’s length principle is no longer adequate to the challenges of the modern global economy and the new meaning of tax justice. It is suggested that the new global tax rules, considered in response to phenomena such as e-commerce and postulates to introduce global taxes should be based on alternative income allocation mechanisms such as formulary apportionment. This new development may initiate a process of taxes drifting away from the arm’s length standard. Al- though we owe it a lot, excessive loyalty can slow down necessary changes. These changes will be very difficult, but nevertheless they seem irreversible.

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