Insights | December 8, 2023

Navigating the arm’s length principle in transfer pricing

We asked our people to share their thoughts about legal terms or concepts that they find useful, necessary, challenging, fun or irritating. Merja Raunio, Senior Advisor, had some thoughts on the arm's length principle.

For dedicated transfer pricing enthusiasts, the term that truly strikes a chord is the arm’s length principle. This principle dictates that associated companies should employ the same prices and terms in their transactions as unrelated companies would under similar conditions. It’s a tool for ensuring a multinational group allocates its taxable income fairly among its subsidiaries.

Transfer pricing is a labyrinth within international corporate taxation, and the OECD has attempted to map it with a hefty 655-page guide (imagine reading a highly technical version of Great Expectations by Charles Dickens). To add to the complexity, this field comes peppered with cryptic acronyms like BEPS, CUP, CCA, DEMPE, HTVI, MAP and ORA, making it a mystical world for those not versed in transfer pricing (and its jargon).

The beauty of this principle rests in its simplicity, as common sense can often steer you toward an “arm’s length” outcome. While digesting the technical guidelines, remember the goal: achieving a result that non-related counter parties would agree upon. It’s about ensuring fairness for both parties involved.

The OECD Transfer Pricing Guidelines acknowledge that transfer pricing is more art than exact science. It calls for judgment, especially when dealing with transactions or transaction types that aren’t seen between independent companies. To quote the eloquent OECD guidance: “it is important not to lose sight of the objective to find a reasonable estimate of an arm’s length outcome based on reliable information.”

If “almost right” won’t cut it for your company and you seek clarity on arm’s length intra-group transactions – or you just want to figure out those cryptic abbreviations – please reach out. We’re here to help.