Length Principle Research Articles

Double Taxation Conventions, Transfer Pricing and Fiscal Space. From Tax Law Underpinnings to Financial Assessments

Abstract This article tackles the sensible and complex problem of international taxation. The main objective of the paper is to create a comprehensive fiscal space, especially at the European level, in the direct taxation domain. The main scope of the research is to identify, evaluate, and assess the main pillars and features of this fiscal space. The research methodology is based both on theoretical analysis of double taxation and transfer pricing issues, but also on practical aspects of several specific case laws. The conclusions of the article highlight the further improvement and development of the arm’s length principle structure, improving double taxation multilateral conventions, recalibrating the mutual agreement procedure, and strengthening the tax authorities’ international cooperation techniques and tactics.

Intra-Group Financing: Analysis of the Coexistence of the Arm’s Length Principle with the General Anti-Abuse Rules

The deduction of interest expenses for corporate tax purposes has attracted the attention of tax policymakers and multinational enterprises owing to concerns about base erosion and profit shifting. Prior to the transposition by Member States of the Anti-Tax Avoidance Directive that established a minimum standard, national rules to limit the tax deduction of interest expenses and anti-abuse rules to tackle perceived aggressive tax planning lacked uniformity and consistency at EU level. This resulted in legal disputes, especially in cross-border intra-group financing cases when transfer pricing based on the arm’s length principle is also applied. The Court of Justice of the European Union has set general guidelines and an interpretative framework. However, the opinion of the Advocate General in the X BV case (C-585/22), suggesting a departure from the Lexel case (C-484/19), raises significant concerns. In the authors’ opinion, this approach could lead to an overreaching application of the GAAR even to arrangements subject to the arm’s length principle that, based on economic rationality and substance, is intended to treat in the same way cross-border intra-group and third-party structures and transactions.

Understanding dual process cognition via the minimum description length principle.

Dual-process theories play a central role in both psychology and neuroscience, figuring prominently in domains ranging from executive control to reward-based learning to judgment and decision making. In each of these domains, two mechanisms appear to operate concurrently, one relatively high in computational complexity, the other relatively simple. Why is neural information processing organized in this way? We propose an answer to this question based on the notion of compression. The key insight is that dual-process structure can enhance adaptive behavior by allowing an agent to minimize the description length of its own behavior. We apply a single model based on this observation to findings from research on executive control, reward-based learning, and judgment and decision making, showing that seemingly diverse dual-process phenomena can be understood as domain-specific consequences of a single underlying set of computational principles.

The Apple Case: The Right Decision for the Wrong Reasons?

This article examines the recent decision of the CJEU in Commission v. Ireland and Others (Case C-465/20 P) (Apple) and argues that, in the decision, the Court breached its own recent, and indeed subsequent, jurisprudence. It ignored what the General Court had actually determined, thus permitting the Commission to apply the arm’s length principle in a way that essentially overruled the provisions of Irish law. The article further argues that the CJEU did so on very narrow, technical, and legally dubious grounds, and that although this allowed it to reach what it may have felt was the right decision, it was for the wrong reasons.

Analysis of interest expense deduction in transfer pricing dispute in Indonesia

This study provides a comprehensive examination of interest expense disputes within the context of transfer pricing in Indonesia. Multinational enterprises frequently employ transfer pricing mechanisms to reduce their tax obligations, often leading to legal challenges in tax courts. The research employs a qualitative methodology, focusing on a detailed analysis of several tax court verdicts related to interest expense disputes. The primary dataset comprises appellate verdicts available from the official tax court repository. The study identifies key factors influencing the outcomes of such disputes, including the strength of the evidence presented, the consistency between recorded contracts and actual economic conditions, coherence between transfer pricing documentation and real-world practices, the legitimacy and rationality of the loan arrangements, utilization of reliable comparability data, and substantive arguments concerning the applicability of the Debt-to-Equity Ratio (DER) for assessing interest expense reasonableness. Furthermore, the research underscores crucial considerations for taxpayers, such as the role of DER in determining expense reasonableness, the regulatory framework governing interest-free loans, methodologies for applying the arm’s length principle in interest expense transactions, and the importance of meticulous documentation in transfer pricing files (TP Documentation).

IT Data-Driven and AI Intercompany Services in Multinational Banks: The Border in Their Regulation between Low Value-Adding and High-Value Services

The banking industry is undergoing a momentous transformation and by 2030, it is estimated that banks worldwide will spend around USD 85 billion on generative AI programs and services. This transformation brings with it uncertainty in applying the correct transfer pricing rules to different service providers in compliance with the arm’s length principle.

Network compression with configuration models and the minimum description length.

Random network models, constrained to reproduce specific statistical features, are often used to represent and analyze network data and their mathematical descriptions. Chief among them, the configuration model constrains random networks by their degree distribution and is foundational to many areas of network science. However, configuration models and their variants are often selected based on intuition or mathematical and computational simplicity rather than on statistical evidence. To evaluate the quality of a network representation, we need to consider both the amount of information required to specify a random network model and the probability of recovering the original data when using the model as a generative process. To this end, we calculate the approximate size of network ensembles generated by the popular configuration model and its generalizations, including versions accounting for degree correlations and centrality layers. We then apply the minimum description length principle as a model selection criterion over the resulting nested family of configuration models. Using a dataset of over 100 networks from various domains, we find that the classic configuration model is generally preferred on networks with an average degree above 10, while a layered configuration model constrained by a centrality metric offers the most compact representation of the majority of sparse networks.

On Combining Instance Selection and Discretisation: A Comparative Study of Two Combination Orders

Data discretisation focuses on converting continuous attribute values to discrete ones which are closer to a knowledge-level representation that is easier to understand, use, and explain than continuous values. On the other hand, instance selection aims at filtering out noisy or unrepresentative data samples from a given training dataset before constructing a learning model. In practice, some domain datasets may require processing with both discretisation and instance selection at the same time. In such cases, the order in which discretisation and instance selection are combined will result in differences in the processed datasets. For example, discretisation can be performed first based on the original dataset, after which the instance selection algorithm is used to evaluate the discrete type of data for selection, whereas the alternative is to perform instance selection first based on the continuous type of data, then using the discretiser to transfer the attribute type of values of a reduced dataset. However, this issue has not been investigated before. The aim of this paper is to compare the performance of a classifier trained and tested over datasets processed by these combination orders. Specifically, the minimum description length principle (MDLP) and ChiMerge are used for discretisation, and IB3, DROP3 and GA for instance selection. The experimental results obtained using ten different domain datasets show that executing instance selection first and discretisation second perform the best, which can be used as the guideline for the datasets that require performing both steps. In particular, combining DROP3 and MDLP can provide classification accuracy of 0.85 and AUC of 0.8, which can be regarded as the representative baseline for future related researches.

A High‐Scalability Graph Modification System for Large‐Scale Networks

AbstractModifying network results is the most intuitive way to inject domain knowledge into network detection algorithms to improve their performance. While advances in computation scalability have made detecting large‐scale networks possible, the human ability to modify such networks has not scaled accordingly, resulting in a huge ‘interaction gap’. Most existing works only support navigating and modifying edges one by one in a graph visualization, which causes a significant interaction burden when faced with large‐scale networks. In this work, we propose a novel graph pattern mining algorithm based on the minimum description length (MDL) principle to partition and summarize multi‐feature and isomorphic sub‐graph matches. The mined sub‐graph patterns can be utilized as mediums for modifying large‐scale networks. Combining two traditional approaches, we introduce a new coarse‐middle‐fine graph modification paradigm (i.e. query graph‐based modification sub‐graph pattern‐based modification raw edge‐based modification). We further present a graph modification system that supports the graph modification paradigm for improving the scalability of modifying detected large‐scale networks. We evaluate the performance of our graph pattern mining algorithm through an experimental study, demonstrate the usefulness of our system through a case study, and illustrate the efficiency of our graph modification paradigm through a user study.

Coca-Cola Transfer Pricing Dispute: United States Case Analysis and Tax Policy Lessons for Indonesia

Decision of the Coca-Cola transfer pricing dispute in the United States Tax Court, which resulted in tax underpayment, can be used as a lesson for Indonesia. This research method is doctrinal, with a law, case, concept and interpretation approach. The data studied is secondary data in the form of laws, cases and relevant references, which are analyzed to obtain conclusions and recommendations. Research shows that the court considered using the Comparable Profits Method by tax authorities to evaluate the profitability of The Coca-Cola Company's supply points, given the difficulty of valuing intangible assets directly and the need for disproportionate profit adjustments. To avoid similar problems, companies in Indonesia must use transfer pricing methods that are reliable and appropriate to local conditions, as well as ensure good intellectual property management and documentation transparency, while tax authorities must monitor transactions between affiliated entities by international standards and the Arm's Length Principle.

Offshoring procurement systems with internal decentralization

AbstractThe extant literature has mostly blamed the setup costs and added transportation costs for the failures of relocating procurement centers overseas, whereas internal decentralization has long been ignored. In practice, issues such as the arm's length principle and information asymmetry can prevent the headquarters from fully centralizing its divisions when offshoring its procurement center overseas. To examine the impact of internal decentralization, we investigate the decision of a firm's headquarters regarding whether to set up an overseas procurement center and whether to further decentralize the procurement center. This article investigates a stylized model and reveals that, even without the setup and transportation costs, it is not always beneficial for the firm to offshore procurement centers under the impact of transfer pricing unless the tax advantage is big enough. An offshoring procurement system with a decentralized procurement center can outperform one with a centralized procurement center when the tax rate disparity is large, because the headquarters' procurement cost information screening makes it benefit more from a decentralized procurement center when the tax rate gap is big. Besides the intuitive trade‐off between the tax‐saving effect and the double marginalization effect caused by the internal decentralization, some indirect effects—cost‐saving effect of the procurement effort and the tax‐paying asymmetry effect (i.e., the procurement center still pays a positive tax even if the headquarters is not profitable)—are found to have a significant impact on the headquarters' choice. Screening the procurement cost information amplifies the advantage of the procurement independent accounting system when the tax rate disparity is big but decreases it otherwise.

TAX COMPLIANCE CONTROL AND AUDIT OF TRANSFER PRICING TRANSACTIONS

The article presents the authors' vision of the features and mechanism of tax compliance control and audit in the management of transfer pricing operations. Effective interaction between business entities and tax authorities in the process of controlling and auditing transfer pricing transactions should be based on the principles of compliance with the help of two tools – assessment of the quality of transfer pricing policy and internal control system (as a result of interaction of internal and external control systems) and assessment of the quality and effectiveness of internal audit of transfer pricing (as a result of interaction of internal control and audit systems). In accordance with the above, tax compliance control and audit becomes a new element of the established system of monitoring of controlled transactions of a business entity, which proposed to understand as the use of tools to confirm the quality and effectiveness of internal control and audit systems of transfer pricing transactions of a business entity by a tax authority, which certifies the taxpayer's commitment and responsibility to comply with tax legislation in terms of compliance with the arm's length principle. Confirmation by the tax authorities of the quality of the transfer pricing policy and internal control and audit system of the entity should be based on the developed, tested and approved system of assessment parameters. Confirmation of the assessment of the quality of the transfer pricing policy and internal control system will demonstrate the responsible position of the taxpayer based on tax compliance with the transfer pricing legislation in accordance with the arm's length principle and will increase the level of trust in it on the part of the tax authorities. In turn, the introduction of such a tool as an internal transfer pricing audit quality assessment into the process of monitoring-controlled transactions will allow the company to submit and use the results of its internal audit in assessing transfer pricing risks to form its tax rating and assess the need to include it in the audit plan. This tool assumes that the internal audit system is sufficient to timely detect violations of tax legislation in the field of transfer pricing in accordance with the arm's length principle.

An efficient approach for discovering Graph Entity Dependencies (GEDs)

Graph entity dependencies (GEDs) are novel graph constraints, unifying keys and functional dependencies, for property graphs. They have been found useful in many real-world data quality and data management tasks, including fact checking on social media networks and entity resolution. In this paper, we study the discovery problem of GEDs—finding a minimal cover of valid GEDs in a given graph data. We formalise the problem, and propose an effective and efficient approach to overcome major bottlenecks in GED discovery. In particular, we leverage existing graph partitioning algorithms to enable fast GED-scope discovery, and employ effective pruning strategies over the prohibitively large space of candidate dependencies. Furthermore, we define an interestingness measure for GEDs based on the minimum description length principle, to score and rank the mined cover set of GEDs. Finally, we demonstrate the scalability and effectiveness of our GED discovery approach through extensive experiments on real-world benchmark graph data sets; and present the usefulness of the discovered rules in different downstream data quality management applications.

Tax motivated vertical FDI and transfer pricing

We examine a domestic downstream producer that acquires a foreign input supplier with the aim of manipulating the transfer price and shifting profits from a high-tax to a low-tax country. The multinational enterprise faces a trade-off: insourcing the input at a high transfer price reduces the corporate tax burden but at the cost of increasing the input cost of its downstream division, which reduces domestic sales and profits. The optimal transfer price balances this trade-off. Regulation under the arm’s length principle is shown to reduce the transfer price, which reduces distortion in the domestic production and expands the region in which vertical FDI benefits consumers and social welfare in the home country. We also show that promoting downstream competition could help align private and social incentives, reinforcing the positive effects of regulation.

Change-point analysis for binomial autoregressive model with application to price stability counts

The first-order binomial autoregressive (BAR(1)) model is the most frequently used tool to analyze the bounded count time series. The BAR(1) model is stationary and assumes process parameters to remain constant throughout the time period, which may be incompatible with the non-stationary real data, which indicates piecewise stationary characteristic. To better analyze the non-stationary bounded count time series, this article introduces the BAR(1) process with multiple change-points, which contains the BAR(1) model as a special case. Our primary goals are not only to detect the change-points, but also to give a solution to estimate the number and locations of the change-points. For this, the cumulative sum (CUSUM) test and minimum description length (MDL) principle are employed to deal with the testing and estimation problems. The proposed approaches are also applied to analysis of the Harmonized Index of Consumer Prices of the European Union.

Advocate General’s Opinion in the X BV Case (C-585/22) – Exploring the Potential Interaction between Wholly Artificial Arrangements and the Arm’s Length Principle – Convergency or Divergency?

The proper characterization of the arm’s length principle (ALP) still represents an unresolved issue in the context of EU tax law since it is not clear whether it represents a rule on allocation of income aimed at avoiding economic double taxation or if should be interpreted de iure condendo as a specific provision aimed at determining the minimum level of substance requirement applicable to intercompany transactions. In this article, the authors express their preliminary comments on the Advocate General’s recent opinion in X BV (C-585/22) which concerns the notion of the ALP in the EU context, its departure from Lexel (C-484/19) and the related interplay between the concept of wholly artificial arrangements and the ALP within the EU tax law framework.

Saudi Arabia Regional Headquarters Program – Transfer Pricing Perspective

In February 2021, the Government of the Kingdom of Saudi Arabia announced its plans to limit the awarding of contracts to foreign multinational enterprises that do not have a regional headquarters set-up in the country. In December 2023, the Saudi Arabia Ministry of Investment in coordination with Ministry of Finance and the tax authorities announced a 30-year incentive plan for Saudi Arabia Regional Headquarters, which includes inter alia 0% corporate income tax and withholding taxes for the entire period. In February 2024, the tax authorities provided more clarifications about the conditions to obtain the benefits of the new regime. These also include the need to comply with the arm’s length principle and transfer pricing rules, which raises interesting questions from a tax technical point of view considering the particularities of the Saudi Arabia Regional Headquarters regime.

The Role of Classical Music Public Services in Building Urban Cultural Soft Power: A Triple Model in China

Recent studies advocate expanding the concept of soft power from the nation to city context and emphasize the importance of culture in building urban soft power. The existing research neglects the role of classical music on urban cultural soft power and reflects the necessity to explore long-term musical projects that are beneficial to residents. By analyzing the case study of a classical-music-educational-based public services project, the Guangzhou Youth Symphony Orchestra (GYSO), this research finds that public cultural services can continuously improve urban cultural soft power through the triple model of “contractor-cultural policies-public participation”. This research argues that although the In Harmony and the EI Sistema projects are also public cultural services of classical music, the triple model of GYSO has multi-faceted impacts on urban development, including cultivating creative class, enhancing residents’ cultural tastes, promoting social cohesion, integrating cultural resources and establishing city branding. This triple mechanism is a model with Chinese characteristics that combines the arm’s length principle with the cultural exception policy.

The Governance, Legitimacy and Efficacy of Facebook's Oversight Board: A Model for Global Tech Platforms?

In May 2020, the social media giant Meta, parent company of social media platforms Facebook and Instagram, established an Oversight Board to allow some recourse to the content moderation policy of the company. The Oversight Board is an experiment in self-regulation (where ‘self’ refers to the company, not industry) by one of the global platforms to address content regulation. The Board is structured on the ‘arm's length principle’ to ensure independence from Meta. This paper analyses the structure for legitimacy and takes a bird's eye view of the decisions that have been made to date for efficacy. Of the more than 100 decisions by the Board, a total of 80% had been overturned. Interestingly, the percentage of overturned decisions has been increasing. This study suggests that the company was indeed not able to handle decisions around content well by itself. Further, the Board reported the need to increase the answerability and comprehensiveness of Meta to its recommendations. The paper suggests a shift in the tone of the global debate on content moderation from a near-absolutist position against moderation to a willingness to consider content governance. It concludes that while there is room for improvement, the structure could serve as a model for other companies that face a similar need to moderate content globally.

Plus Ça Change: The Fate of the Commission’s Open Investigations

Ten years on from the Commission’s opening investigation into the tax rulings provided to Apple by Ireland, the relationship between State aid law and tax rulings has finally reached a level of equilibrium following the decisions of the ECJ in Amazon, Engie and FIAT. Looking at next steps, the Commission will be considering how these decisions impact its open investigations into rulings granted to Huhtamäki, IKEA and Nike. This article suggests that the Commission, if it wishes to continue its cases against Luxembourg and the Netherlands, should shift its approach away from looking at whether or not there has been a deviation from the arm’s length principle to whether there has been administrative impropriety, baseline abuse or selectivity (using the traditional approach).