KPMG report: In defense of the arm’s-length principle

Proposed alternatives to the arm’s length principle lack benefits of neutrality and flexibility

Proposed alternatives to the arm’s length principle lack benefits

The arm’s length principle has been the cornerstone of the international corporate tax system since the League of Nations adopted it in the 1920s as the primary way to allocate taxing rights between countries. The world has changed a lot in the intervening years, and the arm’s length principle is now used in some form by almost every country to determine their taxing rights over multinational businesses. Yet the continuing centrality of the arm’s length principle to the international corporate tax system can no longer be assumed as criticism of its limitations grows—including  from the United Nations, the International Monetary Fund, and the Organisation for Economic Cooperation and Development

The arm’s length principle can remain predominant only if it retains widespread international support—support that can no longer be assumed by taxpayers or governments.  

Read a September 2022 report* [PDF 324 KB] prepared KPMG LLP that argues that all the proposed alternatives to the arm’s length principle lack its two key benefits of neutrality and flexibility, and looks ahead to what the future may bring. 

Read related reports on KPMG LLP’s webpage: Future of the Arm's Length Principle

*This article originally appeared in Tax Notes International (19 September 2022) and is provided with permission.


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