New Trends and Prospects for the Distribution of International Taxation Rights with looking at the tradition since the era of the League of Nations

The most important choice in the era of the League of Nations is the adoption of separate accounting, which considers a domestic physical presence (which corresponds to the present concept of a “permanent establishment” (PE)) of a foreign enterprise to be an independent enterprise. The idea of separate accounting, in which a person (individual or corporation) or a part (PE) that physically contributes to the business income is entitled to a share of the income according to its contribution, is associated with the idea of the labor value theory. In reality, entities sometimes do receive income without contribution, such as in compensation for covenants not to compete. When we allocate income among affiliated enterprises in accordance with the contributions made, there are two types of independent business transactions, or arm’s length transactions, of note: reliable arm’s length transactions, and unreliable arm’s length transactions. We can find examples of both mild derogation from the arm’s length principle and severe derogation from the arm’s length principle. In one case, Amount B, in which profit is attributable to a place of activities according to fictious rate of return, can be considered as mild derogation from the arm’s length principle, in which transactions like unreliable arm’s length transactions are denied. In another case, Amount A, in which taxing rights are allocated to places of demand, can in no way be justified as mild derogation from the arm’s length principle, and must be considered as severe derogation from the arm’s length principle.