Alex Cobham ■ The bell tolls for arm’s length pricing


Listen closely, and you might just hear the beginning of the end of the international rules that have made tax more or less voluntary for multinational companies.

This weekend, as part of their regular spring meetings, the International Monetary Fund and World Bank will hold a day-long conference on the leading alternative: unitary taxation with formulary apportionment. Long promoted by the Tax Justice Network and key figures such as our senior adviser, Prof. Sol Picciotto, but for years treated as unthinkable by the closed circles of corporate tax advisers and OECD country policymakers, this approach has the potential not only to eliminate much of the tax abuses of multinational in high-income countries, but also to deliver a dramatic rebalancing of the global inequalities in taxing rights from which lower-income countries in particular suffer.

Here’s the blurb:

Splitting the Riches: The Present and Future of Taxation by Formula

The current framework of international corporate taxation—based on the “arm’s-length principle” to split profits of multinationals between countries—is increasingly being challenged by experts, businesses and civil society. New international standards and guidelines under the G20/OECD BEPS initiative aim at addressing key weaknesses in the current framework, but do not tackle the root cause of the significant spillovers inherent to the system. At the same time, digitalization and the growing importance of intangible assets create new challenges. These developments have elevated fundamental discussions on whether the arms-length principle is sustainable. While much has been written about the problems with the current system, much less is known about the advantages and disadvantages of an alternative system, based on a formulary approach to profit attribution. This conference will bring together various experts to discuss these issues.

Even in the current context of disillusionment with arm’s length pricing, this marks a significant break with the past for the IMF and World Bank to hold such an event – and at one of their moments of greatest profile. Perhaps inviting a reprobate from civil society to give a keynote at the last annual meetings wasn’t such an exception.

Earlier this year, we were highly critical of the lack of appetite for serious reform at the Platform conference (the OECD, IMF, World Bank and UNDP). But outside of this grouping, both the IMF Fiscal Affairs Department and the recently formed tax team of the World Bank have shown a clear willingness to engage with the international challenges, and the number of tax justice allies among the speakers here suggests that this pattern continues.

It’s a particular tribute to the success of the Independent Commission for the Reform of International Corporate Taxation (ICRICT), which was established precisely to normalise such once-radical thinking, that their commissioner Leonce Ndikumana is included.


This is not an isolated event, of course, but instead a further milestone in a gradual process which is now gaining powerful momentum. Here’s a partial, potted timeline of (profit) shifting attitudes:

  • Late 1990s onward: growing research on development costs of tax abuses
  • 2000: Publication of influential Oxfam report on the damage done by tax havens, including a call to shift to unitary taxation of multinationals
  • 2003: Legal establishment of the Tax Justice Network marks the formal beginning of international civil society mobilisation against tax avoidance, tax evasion and financial secrecy
  • 2007: First major media front page story on multinational profit shifting
  • 2008-09: Christian Aid and ActionAid launch major tax justice campaigns
  • 2008+: Major financial crisis, focusing minds in rich countries on the scale and costs of revenue losses here too
  • 2009: London G20 ramps up the rhetoric
  • 2013: Broad-based INGO campaign sets tax justice goals as centrepiece for G8 meeting to deliver important commitments to progress
  • 2013-15: G20 mandates the OECD to sort out the international tax rules, in the BEPS Action Plan (Base Erosion and Profit Shifting), with a single aim: reduce the misalignment between where profits are declared, and the location of real economic activity. Crucially, however, consideration of unitary approaches is barred – making failure of the whole exercise broadly inevitable.
  • 2015: The Independent Commission for the Reform of International Corporate Taxation (ICRICT) releases its Declaration. The primary recommendation is to tax multinationals as single firms. “States must reject the artifice that a corporation’s subsidiaries and branches are separate entities entitled to separate treatment under tax law, and instead recognize that multinational corporations act as single firms conducting business activities across international borders.” The arm’s length principle is simply not fit for purpose.
  • 2017-: Even the most ardent defenders of the OECD rules are facing the reality that the BEPS process may be seen in hindsight as the last great defence of the arm’s length principle. US tax reform goes its own sweet way. The EU is increasingly focused on delivering the Common Consolidated Corporate Tax Base (CCCTB), completely at odds with BEPS. And the OECD and EU are competing to deliver digital economy tax proposals that also seem likely to apply a different basis, to say nothing of the ongoing OECD work on profit splits, which also circumvents arm’s length pricing…

A significant speech

Then, late last year, the tax lead from the IMF – one of the most influential international organisations – declared that time is up for the international tax rules. In a scathing speech, Victoria J. Perry – Assistant Director in the Fiscal Affairs Department and Division Chief of the Tax Policy Division at the International Monetary Fund – argued powerfully that:

our current system is capricious in result, expensive to operate, and permits and even encourages the relocation and minimization of measured taxable income, in many cases divorcing that tax base from real economic activities.

Dr Perry was also, until late last year, the President of the National Tax Association of the United States. And it was in her outgoing speech that she set out a vision for a comprehensive overthrow of the existing international tax rules.  The speech and slides are published by the NTA, and offer a clarion call for “a new global paradigm” for international tax: “the arm’s length principle has become increasingly divorced from reality, to put it kindly.”

The challenge for the conference this weekend, and then for everyone with an interest in fairer and more effective international tax rules, is as Victoria Perry concluded (emphasis added):

Multinational groups should be taxed on a unitary basis, eliminating the use of the arm’s length principle within them. […]

The world has changed a lot in the last 95 years, a lot more than has our international tax system. A century is enough—can we create a better design in the next five years? 

The bell tolls…

As with the ABC of tax transparency, unitary taxation of multinational companies is an idea that seemed wildly unlikely to those in expert circles when the Tax Justice Network began to push for radical change from the existing rules.  But just as Automatic exchange of tax information is the new standard; just as Beneficial ownership transparency is increasingly expected; and just as Country-by-country reporting by multinationals now exists and is on the road towards public availability; so too, has unitary taxation of multinationals begun to make its way onto the international agenda. Our ABCs of tax transparency are summarised here in our little explainer vid:

There are long fights ahead before all of these critical tax justice measures are fully in place, and in a way that ensures the benefits are fully extended to lower-income countries. But make no mistake: a significant, progressive shift is underway in the global distribution of taxing rights. It will ultimately require the inclusive forum of the United Nations – but this weekend, the Bretton Woods twins are doing their bit by holding up to scrutiny the gaping cracks in the OECD framework.

Ask not for whom the bell tolls; it tolls for the ALP…

Related articles

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.