Digital tax proposals spur arm’s-length principle debate


Sarah Gabbai and James Ross commented on the European Commission’s proposals for taxation of the digital economy and how theygenerally prioritise a profit split method in determining the profitsattributable to a digital permanent establishment, thus suggesting a move towards formulary apportionment.

“The Directive is not overly prescriptive as to which profit splitting factors or allocation keys are used—they could, for example, be based on R&D expenses or data collected—as long as they stronglycorrelate to value creation. Given that the Directive potentially applies to a very wide range of digitalbusinesses, many of which will not necessarily derive their value from users or user participation, theDirective rightly allows taxpayers some discretion as regards to which profit-splitting factors to use,provided that they are consistent with the conclusions of the functional analysis,” Gabbai and Ross toldTP Week.