Tax and Technology

S. 123Formulary Apportionment under Pillar One

Brian Schwechel

S. 1241. Introduction

There has been much discussion about transfer pricing and its accompanying arm’s-length principle (ALP) during the last few years. The ALP states that related parties should be treated as separate entities, and transactions between them should be conducted as if they were unrelated parties. Since some authors consider the ALP to be a way of shifting profits or even too complex, the question arises whether the ALP can be replaced by a more straightforward, more efficient method. In addition, some authors believe that, even with the value creation concept introduced by the Organization for Economic Cooperation and Development (OECD) in 2014, the ALP cannot cope with the mobility of people and capital in the global economy. The problems of the ALP also result from the fact that there are different interpretations of the value creation and economic activity of digital business models. Therefore, adapting the tax system to the globalized and digitalized world has not been feasible. The OECD has been dealing with the problems of the ALP for years, and they were reinforcing the approach with, most recently, the OECD Tra...