The case

In recent decades, international tax law has applied the “arm’s length” principle: in a country where a local subsidiary of a group was active, the appropriate profit was attributed to this subsidiary for its activity. After a careful comparison of the tax authorities of the respective country with independent, other similar subsidiaries in the country of resident, the “appropriateness” was determined in the specific case and verified on the basis of statistics. In future, in addition to the already reported “arm’s length” profit from the local activity of the subsidiary, large groups should allocate a part of the consolidated group profit to the countries where the subsidiary is located. The consolidated net profit includes, among other things, the value of the patents, the research and development work paid, the proceeds from the worldwide sales of products, the manufacturing costs for the products, the costs of product information, marketing and the group central administration costs after deduction of the financial income. In future, this group profit is to be taxed at 15%.

Source: today’s NZZ Reader’s Opinion (heavily modified)

The commentary

The “arm’s length” principle has sensibly and correctly determined the local profit allocation of subsidiaries for decades. With the global minimum tax, this proven principle could be partially overruled in the future. Is this factually correct and justified in terms of tax methodology? From the perspective of a highly industrialised small state, hardly!

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