Arms length profit is fiction – an ignoratio elenchi?

Amongst my favourite theories in philosophy is what became known as Meinong’s Jungle. It’s mainly that I like the name. The theory is principally used where metaphysics meets epistemology to ascribe facts concerning non-existent subjects.

Yup, it’s a real useful theory in taxation…

Anyway, I think I’m correct in saying that people agree that a unicorn is basically a horse with a horn coming out of its forehead. So a unicorn has four legs. From a certain epistemological point of view, however, this isn’t actually a fact. There is no real thing called a unicorn. The problem is one of assigning truth (which appears to be widely agreed upon with regard what unicorns are) to a statement about something which does not exist.

Alexius Meinong essentially argued that these nonexistent objects, whilst not existing, were being in some way. So, whenever you refer to a unicorn, you are referring to something that subsists in some sense, but doesn’t actually exist.

Thus, it can be a fact that a unicorn has a single horn. And that the golden mountain is actually golden.

Now, following my post yesterday, I had a brief conversation on twitter with David Quentin. He was, I think, arguing the fictitious nature of determining the profit using the arms length principle. That is, the profit of an individual entity within a group is a fiction.

I should point out I’m going off the general criticism I’ve heard from various people, so I’m not addressing any specific points he raised, more the general argument I’ve heard before.

I think that somebody arguing this view should distinguish between the profit of the group and the profit of entities within that group. The group profit may not be regarded as fictitious because it measures the interactions of the entity with unrelated parties. All intragroup transactions cancel out.

The argument for unitary taxation is that it focuses on real numbers. The group profit is real and that numbers of employees, staff, assets are real.

From this point of view, I do appreciate the fiction argument against transfer pricing and the arms length agreement. The profit allocation is considered to be an internal fiction of the group.

However, I don’t think this argues in favour of unitary taxation. Unitary taxation adopts a different fiction, the unitary allocation formula. I have drafted a post which I may or may not publish exploring this idea, but I essentially think the whole ‘fiction’ reference is misleading and irrelevant.

Returning to Meinong’s Jungle, we are looking at the criticism that the ‘arms length profit’ is ‘fiction’, it does not exist. So let us take it as a fact – the arms length profit is a nonexistent object.

So what?

Existence is no impediment to something being logically sound. Just as Meinong argues that the golden mountain is golden, I would argue that if the ‘arms length profit’ is the correct profit to be taxed, it really doesn’t matter whether it actually exists or not.

I think that correctness applies morally too. If an arms length profit is morally the ideal profit to be taxed giving up the attempt to determine it is a moral failure.

Of course, it is arguable whether an arms length profit is morally the ideal profit to be taxed, but I do not think there is a better candidate using a deontological principle-based approach.

I can see how consequentialists might arrive at a different conclusion.

But all I wanted to do with this post is to make the point that the fictional nature of something does not preclude its being logically sound or useful. Or being full-stop.

The discussion of whether an arms length profit is a fiction or not is somewhat of an ignoratio elenchi.

About Ben Saunders

I'm a Chartered Tax Adviser and a freelance writer. This is my personal blog about, well, mainly taxation. I might put other stuff in. Who knows.
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3 Responses to Arms length profit is fiction – an ignoratio elenchi?

  1. Is profit not a fiction itself? Certainly profit as calculated by reference to GAAP is, what with all the rules about revenue recognition, accruing or providing for costs that may never happen, valuing stock and other assets, and so on. So anything based on profit, such as Unitary Taxation, is itself a fiction.

    Saying something is a fiction and should therefore be replaced with another fiction seems a little arbitrary.

    • I removed part of this post exploring that idea. Briefly, I think it is a bit of a Catch 22 situation. You have to accept a fiction one way or another. If you simply believe profit is a fiction, then unitary taxation accepts a fiction it has openly rejected.

      But if you think that group profit is not fiction but the profit allocation is fiction, you implicitly accept the non-fictional status or ‘correctness’ of certain profits within the group. And then deliberately tax them according to a different basis which cannot be anything other than fiction.

      In short, the fiction argument is logically incoherent. But I think the ‘fiction’ criticism is irrelevant regardless.

      • I think Unitary Taxation proponents would argue that there is a non-fictional group profit, and that the basis UT provides for allocating and taxing them is intended to be non-fictional, or at least as close as one can get. The focus on identifying a few clear factors (sales, assets, staff) seems to be in line with that.

        Or: if you accept that transfer pricing adjustments will always be subjective and arbitrary (even if only to an extent) then using a prescribed objective allocation must introduce fewer new fictions and so should be preferred.

        By analogy: we can never provide a truly accurate account of a historical event, so anything purporting to be such will be at least partly fictional. But we can be fairly safe in assuming that an account written by a partial and prejudiced historian with an ulterior motive is going to be more fictional than a simple recitation of known facts.

        So in support of UT I could argue that TP adjustments brought in by the directors are more likely to be fictional than an externally-determined UT formula: although the arm’s length principle is objective it leads to subjective adjustments, whereas the UT formula gives objective adjustments.

        The weakness is that the UT formula can only be determined using subjective criteria (which seem to need to vary by sector). So we go from a situation where the general principle is solid but the specific adjustments are fictional, to one where the final adjustments are immutable but they are based on a debateable principle.

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