The Arm's Length Principle in the 21st Century - A Literature Overview

Stefan Greil


The international tax system faces substantial challenges with respect to taxing the profits of multinational enterprises. Policymakers have put the focus on the taxation of the digital economy. The aim of this article is to provide a comprehensive overview of the arm’s length principle (ALP) and the allocation of taxing rights of business profits, the concept of value creation, the impact of digitization on the allocation of taxing rights, and the current discussions regarding this topic. Finally, I make a connection between the value creation concept and the challenges of digitization, and ask if the ALP is fit for purpose. The paper is intended to refocus attention on the proper application of the ALP in the 21st century, as the rethinking exercise is more demanding and requires more work than the research which has been published so far. By doing this, I also provide food for thought about matters which could be further explored in order to enhance the current international tax system.

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