The dealing at arm’s length principle (ALP) should ensure the allocation of profits to be aligned with the economic activity that produced the profits. On the one hand, it is, however, a fallacy to compare the conditions in a controlled transaction with the conditions that would have been agreed upon between independent enterprises. On the other hand, there is no economic consistent theory within the ALP to align value creation properly and unambiguous to companies of a multinational group. Instead, the ALP creates possibilities for international tax planning, risks of double taxation, a potential for high tax compliance costs and administration costs. At least the results of the G20/OECD BEPS-Project seem to reduce the international tax planning possibilities in this area. However, the results create new difficulties like the assessment of arm’s length behaviour and the (expected) increasing usage of the transactional based profit split method. Considering this, this article introduces a formulary and transaction based profit split method. This method will not avoid all disadvantages of the ALP. However, it could help to establish an international consistent application in order to minimize profit shifting, to enhance tax certainty for taxpayers and to reduce tax compliance costs and administration costs.
Intertax