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Fairness and the Arm’s Length Principle in a Digital Economy
[Fairness und der Fremdvergleichsgrundsatz in der digitalen Ökonomie]

Author

Listed:
  • Greil, Stefan

    () (University of Hamburg)

  • Schwarz, Christian

    () (Department of Economics of the Duesseldorf University of Applied Sciences)

  • Stein, Stefan

    () (Quantum Steuerberatungsgesellschaft mbH)

Abstract

The OECD Base Erosion Profit Shifting (BEPS) Initiative as well as the current fairness oriented public discussion regarding the taxation of digital business models highlight the importance and complexity of the arm’s length principle. In a theoretical model of an internationally fragmented digital good’s production process, we show that fairness considerations of tax authorities (namely inequity aversion) can result in a falling apart between a perceived “fair” and arm’s length distribution of profits across tax jurisdictions. Our model predicts that a multinational firm follows the fundamental paradigm of international taxation, i.e. the arm’s length principle, to properly incentivize internal agents involved in the production of a digital good. However, with inequity averse tax authorities, we find that tax authorities “prefer” a more equal distribution of profits compared to the arm’s length allocation. From a multinational firm’s perspective, inequity aversion among tax authorities dampens the strategic effect to – in accordance with arm’s length principle – shift profits to low tax countries.

Suggested Citation

  • Greil, Stefan & Schwarz, Christian & Stein, Stefan, "undated". "Fairness and the Arm’s Length Principle in a Digital Economy
    [Fairness und der Fremdvergleichsgrundsatz in der digitalen Ökonomie]
    ," Duesseldorf Working Papers in Applied Management and Economics 42, Duesseldorf University of Applied Sciences.
  • Handle: RePEc:ddf:wpaper:42
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    corporate income tax; profit-shifting; arm's length principle; fairness; Unternehmensbesteuerung; Gewinnverlagerung; Fremdvergleichsgrundsatz;

    JEL classification:

    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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