International profit allocation and sustainability : rethinking the distribution of taxable profits among jurisdictions in light of the SDGs

International Profit Allocation and Sustainability: Rethinking the Distribution of Taxable Profits among Jurisdictions in Light of the SDGs This thesis examines whether international profit allocation rules based on the OECD Transfer Pricing Guidelines, can be better aligned with sustainability-related societal concerns as defined by the United Nations Sustainable Development Goals (SDGs), and whether alternative frameworks can operationalize such an alignment. The analysis considers that taxation is an important tool to foster sustainability, also in the international scene. It demonstrates that while sustainability is not an objective of transfer pricing rules, both normative and positive grounds exist for incorporating sustainability-related considerations into international profit allocation. Although the SDGs are not binding on the international tax system as a whole, they exert significant normative and interpretive influence. Moreover, foundational principles of international tax allocation—such as economic allegiance and the benefits principle—are sufficiently broad to accommodate sustainability-related factors when these materially affect income generation. From a practical perspective, the thesis finds that the current profit allocation framework, grounded in the arm’s length principle and operationalized through the analysis of functions, assets, and risks (FAR), systematically allocates a disproportionate share of taxable profits to high-income jurisdictions and does not account for the social and environmental burdens associated with global production, leaving some jurisdictions fiscally undercompensated. As a result, the existing framework exacerbates global inequality, weakens the fiscal capacity of resource- and labor-providing jurisdictions, and undermines progress toward several SDGs, most notably SDG 10 (Reduced Inequalities). The introduction of the value creation standard did not materially address these shortcomings, but rather reinforced established distributive patterns. To address these limitations, the thesis develops three alternative frameworks that integrate sustainability-related factors into profit allocation while remaining anchored in existing transfer pricing concepts. These include: (i) an expanded recognition of location-specific advantages, including natural resource-based advantages; (ii) an adjustment of risk allocation to reflect jurisdictions’ exposure to sustainability-related internal risks; and (iii) the incorporation of negative externalities as hidden profit drivers. While these proposals cannot transform underlying market structures or fully internalize social and environmental harms, they demonstrate that profit allocation rules can be reoriented to produce more sustainability-aligned outcomes. The thesis concludes that aligning international profit allocation with sustainability is legally permissible and practically justified, albeit inherently limited by the allocative nature of transfer pricing. Meaningful progress therefore depends on integrating transfer pricing reform within broader fiscal, regulatory, and cooperative frameworks.