The legal nature of corporate groups’ entities and the future of arm’s length principle and transfer pricing

Abstract

The search for an effective taxation of business income derived from the activities of multinational corporate groups is one of the main challenges of the current international tax system, which is built around the idea that related parties should carry economic relations as if they were independent, observing market conditions and the arm’s length principle. This background is based on the ‘entity approach’, in corporate law terms, but does not seem to fit the hardly argued consensus that the global and digital economy is characterized by highly integrated and widespread groups, acting as one, thus fitting the notion of the ‘enterprise approach’. This dichotomy found even more practical repercussions, in the field of international taxation, since the development of the work carried out by the OECD in ‘taxing the digital economy’ and the consequent discussions on new allocation nexus, differently than transfer pricing and arm’s length principle, and moving towards a practical application of the ‘enterprise approach’. The paper presents an overview on both the theoretical and practical implications of an adoption of each of the approaches, discusses the problems found at current OECD proposals and presents the outlines for an alternative solution to this dichotomy in the field of international taxation.