The Arm’s Length Principle Evolves Towards a ‘Value Creation Functional (i.e. DEMPE) Formula Standard’: A Barrier or a Gateway to Locational Business Planning?

Value creation vis-à-vis the DEMPE rationale and methodology converted a conceptual notion associated with contributions to value creation but lacking prescription into a new standard to allocate profits on equal footing associated with independent parties, to achieve outcomes for tax purposes consistent with the directions of the ALP. Within this context, this paper questions whether value creation could or should be based on the functional (i.e. DEMPE)-formula-based standard applied to allocate profits and whether such an approach would serve as an anti-avoidance function to target or abet tax avoidance framed by apparently genuine structures –“accurately delineated” (i.e. alignment of the allocation of profits with value-generating activities) that, in terms of how income is earned, might not be commercially rational. that said tax avoidance that goes beyond the customary understanding and limitations of “abuse” under domestic law norms paradoxically could make base shifting planning considered to be “abusive” easier to sustain within the BEPS precepts. Thus, the functional (i.e. DEMPE)-formula-based standard coupled with commercial rationality test needs to be interpreted in a way that determines whether the performance of those functions by each party in a specific jurisdiction in any event is rational from a commercial/business purpose perspective based on certain business parameters, to provide taxpayers with a higher level of certainty, and in turn to devise suitable objective perceptions or standards concerning the meaning of “rationality” in business operations for which typically there are open various legally sustainable ways to achieve the same economic outcomes