COVID-19 Challenges for the Arm’s Length Principle


The impact of the COVID-19 pandemic is ubiquitous. Among its many other effects, it creates challenges for the international tax system. That includes pressure on tax treaty rules (in particular, how treaties operate when the normal mobility of people is suddenly curtailed), a matter on which the OECD has issued guidance.1 Further, given that for many companies, the coronavirus has increased the importance of being able to conduct business digitally, the crisis also exerts extra pressure on the need for a solution to the taxation of the digital economy.

Those challenges also have implications for the arm’s-length principle. That is because in some cases the virus has created market conditions or events, and led to responses to those conditions and events, that are not directly addressed by existing transfer pricing guidance (specifically, the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations). That raises the question whether further guidance addressing some or all of those concerns might be useful. Unsurprisingly, the OECD has already received several requests from states and businesses to explore what additional guidance on the arm’s-length principle might be possible.

This article refers to the various questions of how the arm’s-length principle should operate in these unusual conditions created by COVID-19. Those operational issues concern the period when market conditions are in a relevant sense altered (which may vary by industry) and relate primarily to the uncertainty of how the arm’s-length principle should be applied in this period.

However, it may also be asked whether the pandemic has a wider significance for the arm’s-length principle. That might be the case if the period of disruption caused by the virus offers some lessons or insights that could alter our understanding of the principle. If that is the case, the impact of those lessons might be more widely relevant and not necessarily restricted to the period of market disruption caused by the virus.


Richard S. Collier and Matt Andrew