Emerging Perspectives on the Evolving Arm’s Length Principle and Formulary Apportionment

Abstract

A decade ago, the arm’s length principle on which transfer pricing rules and practices are based, was entrenched, and suggestions for change minimal and largely dismissed by practitioners. In this article we discuss more recent calls for a change in approach, many of which focus on some form of formulary apportionment. While there is an increasing body of academic literature on formulary apportionment, it is much less referred to in the practitioner literature and has received less focus in the context of tax practitioners. We present evidence from a longitudinal study, of a change in attitude among senior transfer pricing professionals, from strong support for arm’s length pricing coupled with a dismissal of formulary apportionment, towards greater willingness to raise the limitations of arm’s length pricing, coupled with a muted acceptance, and application, of some formulary approaches.