The Arm’s Length Standard at a Crossroads: Theory, Practice, and Reform

• In Event: Minimum Tax Regimes and Tax Planning

Abstract

This is the first paper that seeks to acknowledge and shed light on the fundamental flaw in transfer pricing: the Arm’s Length Standard (ALS) underestimates system income and allows for tax planning and minimization strategies. Yet, this analysis concludes that while the ALS is imperfect and open to manipulation, it may still be the most workable framework for facilitating global trade and limiting double taxation. In this paper, we review the spectrum of transfer pricing considerations, ranging from the theory of the firm to the evaluation of practical considerations. We then supplement the discussion with semi-structured interviews of senior tax professionals who also evaluated the OECD’s minimum tax reforms, which aim to address undertaxed profits but introduce additional complexity and uncertainty. Our findings highlight that preserving the ALS’s market-based foundations while managing rising administrative burdens is critical for the future of international taxation.

Author

• Amparo Mercader, Georgetown University