Digital economy: say goodbye to the arm’s length principle

How the push for digital tax consensus could upend transfer pricing as we know it.

After a slow and tentative start, the OECD’s push for a solution on how to allocate and tax the profits from digital business is gathering momentum.

Following consultations, initial proposals from earlier in the year have now been crystallised into a twin-pillar framework and series of detailed options within it (referred to in this article as the ‘OECD programme of work’).

The G20 has endorsed The Organisation for Economic Co-operation and Development’s (OECD’S) roadmap for resolving the ‘tax challenges arising from the digitalisation of the economy’ (BEPS Action Plan One) and is committed to working toward a consensus-based long-term solution by the end of 2020.

While global consensus is clearly preferable to today’s fragmented approach to taxing digitally-derived revenue, the OECD’s search for a solution could end up heightening the risk of double taxation for all businesses rather than just Big Tech giants.

And under the reallocation of profits and minimum tax proposals that have emerged following a recent round of consultations, the arm’s length principle that has governed transfer pricing for decades could become obsolete, with all the upheaval that would result.

So, what does the OECD have in mind and what are the implications? Will the proposals survive the political realities of sovereign state control over tax policy, and the entrenched national interests that go with it?