INTRODUCTION

I now turn to several detailed case studies in which I apply the principles and theory developed in preceding parts. The first case study I examine, which falls broadly within the sphere of international economic relations, involves the so-called arm's length standard in bilateral tax treaties. This is the standard used to allocate income among related businesses, for example, corporations that are in a multinational corporate group. This allocation in turn determines which countries have a right to tax the income of the group, and how much income each country can tax.

Under the arm's length standard, prices paid for goods or services transferred between businesses under common control (“transfer prices”) are adjusted if necessary for tax purposes to correspond with the prices that would be paid between unrelated businesses (“arm's length” prices). The arm's length standard is also sometimes referred to as the “separate accounting method” or the “independent enterprise method.”

The arm's length standard can be distinguished from another method for allocating income among related businesses, so-called global formulary apportionment or fractional apportionment. Formulary apportionment eschews a focus on particular transactions and instead allocates some portion of the total income of a multinational group of businesses, determined by a formula, to individual members. The formula can be based on a number of factors, including the percentage of property, payroll, or sales attributable to a particular member.