Abstract
This article compares the Profit Split Method (“PSM”), one of the transfer pricing methods for the application of the arm’s length principle, with Formulary Apportionment (“FA”) which is discussed as an alternative to the arm’s length principle as such. In the course of this article, we analyze and compare both approaches, in particular by considering compliance costs, resource allocation, and transition costs. Even though at a first glance FA might be viewed as similar to the PSM (or even more advanced), we demonstrate that there are crucial differences between both approaches. Based on our analysis, we conclude that FA is not an alternative to the application of the PSM. In contrast, we believe that the PSM will gain more and more importance in future. Therefore, we present our proposals to further improve the institutional framework for the application of the arm’s length principle in general and the PSM in particular. Our proposals will help to decrease double taxation, and it will lead to lower compliance costs for the taxpayers as well as for the tax authorities.
We thank Lydia Blaschtschak, Catharina Klepsch, Bernadette Kraus and Luis Fernando Medrano Echalar for their valuable research support.
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Kroppen, HK., Dawid, R., Schmidtke, R. (2012). Profit Split, the Future of Transfer Pricing? Arm’s Length Principle and Formulary Apportionment Revisited from a Theoretical and a Practical Perspective. In: Schön, W., Konrad, K. (eds) Fundamentals of International Transfer Pricing in Law and Economics. MPI Studies in Tax Law and Public Finance, vol 1. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-25980-7_13
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