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Arm’s-length principle is still being called into question

At the OECD’s public consultation in Paris this week, the arm’s-length principle was called into question a number of times by speakers.

While even those most opposed to the principle admitted they did not think it should be ignored completely, the general consensus was that if taxpayers are going to diverge from the principle, they should provide strong arguments as to why they have done so, rather than hiding behind definitional issues in transfer pricing guidance.

Richard Murphy, speaking on behalf of the BEPS Monitoring Group, said he felt there is a prevailing feeling that transfer pricing documentation exists to defend the arm’s-length principle.

“I’m not saying arm’s-length doesn’t have its use but if it worked properly we wouldn’t be here.”

In his closing remarks, Will Morris, chairman of BIAC’s (business advisory arm to the OECD) tax and fiscal policy committee said:

“I believe, in many areas, that the arm’s-length standard continues to work, and I also believe that there are good reasons for it being used as the default, or the starting point, in all areas.”

“However, where it doesn’t work, we shouldn’t try to cover that up by saying it does and then coming up with yet another ad hoc “improvement” to the arm’s-length-standard.”

Morris added that there may, in some cases, be very good reasons for diverging from the arm’s-length standard.

“But, if we’re going to do that, we should do it very clearly, and with full agreement from a broad range of countries that this is a different taxing principle. We do ourselves no favours by classifying it as just another arm’s-length standard method that may or may not work in a hierarchy of methods that businesses and different countries may choose, or not, to adopt. That only leads to more and more double taxation as countries go their different ways. We shouldn’t necessarily be scared of special methods. The arm’s-length-standard is the default, and the case needs to be made for deviating from it. But if that case can be made, then let’s do it transparently, and with a clear articulation of the taxing principle, so that the desired outcome is clear to all parties.”

Many tax treaties make allowances for formulary apportionment and the profit split method, so alternatives to the arm’s-length standard are available for taxpayers.

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