Originally published: April 2024
The central role of the arm’s length principle (ALP) in international tax has always had its critics, but as ALP grew in importance, the critique also seems to swell up. ALP increasingly depends on human “functions, assets, risks” (FAR), but as I explained earlier this year (https://lnkd.in/gWJPt95s), new business realities put that idea under pressure as corporate profits are becoming more financialised (ie dependent on financial flows where profit volume is relatively large as compared to human activity), more concentrated in super-rents (ie profits greatly exceeding labour and capital inputs), more digital (ie no clear location) and the humans themselves more mobile. ALP outcomes don’t always have intuitive popular appeal and politicians in particular seem to prefer a stronger allocation to location of the customer (https://lnkd.in/euhMTVF9). The rising tide can create a feeling akin to the oft quoted lines by poet W.B. Yeats: “things fall apart, the centre cannot hold”. Alternatives like formulaic apportionment, DBCFT, location specific rent, a wider 12B approach make OECD’s two pillar approach appear mere tinkering of the system. At face value, none of them appear strong enough to surpass ALP and maybe they never will. International tax has never had to change its primary base it was built on, but other fields have. And we know from experience that a paradigm shift can happen suddenly and change everything. Dissatisfaction with the status quo is a better early warning sign of a paradigm shift than the presence of a strong competing theory.
We also know that if the centre does not hold, a new centre will almost be certainly be found, even if it is difficult to imagine how that would look like. As Brian Wilson puts it (https://lnkd.in/e48R_9kr), I know there’s an answer, but we’ve got to find it ourselves. Even no such answer exists today, you won’t find it by isolate yourself inside your head.
But it’s also possible we’re reading too much in the tide of critique, some of which just seems brought about the sensationalist tone of modern media and the unlocking a global international tax debate for the first time (instead of a series of domestic tax policy debates) that does not purely consist of polite academics. After all, ALP is a quite flexible principle, meaning that even if the centre does not hold, it can still bend.
Obvious disclaimers: this is not advice. These views are my own and do not necessarily represent my employer.
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