Reflecting on the “Arm’s Length Principle”: What is the “Principle”? Where Next?

  • J. Scott Wilkie
Part of the MPI Studies in Tax Law and Public Finance book series (MPISTUD, volume 1)


The “arm’s length principle,” is fundamentally antithetical to the economic, commercial and business characteristics of the taxpayers whose relations with each other within commonly controlled groups it is meant to evaluate and discipline. This collision has always been embedded in the “principle” but is becoming more prominent and disruptive in transfer pricing as manifestations of “intangible” value are recognized as being responsible for entrepreneurial returns perceived to be highly mobile. Where and how international business income is earned is accordingly becoming increasingly difficult to discern according to conventional physical, separate entity and transaction precepts underlying international tax and treaty rules, principles and practices. The “arm’s length principle” is facing many challenges. Effects of “globalization,” and more precisely the increasingly evident importance of “intangible” manifestations of value within corporate groups to account for where income ought to be considered to be earned, disturb and amplify long standing tensions underlying the application of the arm’s length principle to enterprises that essentially are single economic “firms”. This paper reconsiders the sustainability of the “arm’s length principle” as a “principle” with reference to distortionary effects that arise from subdividing an “economic firm” into constituent legal “fictions” spread across a number of tax jurisdictions. It advocates consideration of a recalibration of the “principle” by adopting objective reference factors short of “formulating apportionment” as commonly discussed to determine where income-earning activity is considered to take place and resulting income earned.


Corporate Taxation Transfer Price Permanent Establishment Legal Fiction Business Restructuring 
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Copyright information

© Springer-Verlag Berlin Heidelberg 2012

Authors and Affiliations

  • J. Scott Wilkie
    • 1
  1. 1.Canadian Tax FoundationCanadaUSA

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