What is Arm’s Length Principle?

What is Transfer Pricing?

Transfer Pricing can be defined as the determination of the cost of transactions of goods and services between two related companies owned and/or operated by the same parent company, often across international borders. Companies often use transfer pricing to avail themselves of tax benefits. Multinational companies avail the benefits of different tax regimes by practising transfer pricing. The main objective of transfer pricing is deciding the transaction costs of these intra-group transactions. Transfer Pricing undertakes the concept of the Arm’s Length Principle....

What is Arm’s Length Principle?

Arm’s Length Principle is the principle practised under transfer pricing, which ensures that the cost of transactions between the related entities is determined with the assumption that they are unrelated entities, to ensure the fair profit allocation between entities. The Arm’s Length Principle is defined by the United Nations and the Organisation of Economic Co-operation and Development (OECD)....

Purpose of Transfer Pricing

1. Determination of Transaction Costs: The main purpose of transfer pricing is to determine the transaction costs of goods, services, rights, intellectual property, etc., between different entities of the same parent company, generally across borders, to avail tax benefits....

Importance of Transfer Pricing

1. Profit Optimisation: Proper transfer pricing allows MNCs to allocate their profits efficiently among their various subsidiaries. By setting fair practices for intra-group transactions they can optimise their global tax liabilities, avoiding overpayment and underpayment of taxes....

Issues Related to Transfer Pricing

Although transfer pricing helps in an overall reduction of tax reduction, it comes with certain issues. Issues related to transfer pricing are majorly divided into three subcategories namely, Jurisdiction issues, Allocation issues, and Valuation issues. These three are explained below:...