Arm’s Length Principle

What is the Arm’s Length Principle? 

The Arm’s Length Principle dictates that the pricing of goods, services, and intangible assets exchanged between related entities should mirror what independent companies would charge in similar circumstances. This principle prevents MNCs from manipulating transfer prices to shift profits to low-tax jurisdictions, ensuring fair taxation.

According to the OECD Transfer Pricing Guidelines, the principle ensures that tax authorities can assess whether profits are appropriately allocated across different tax jurisdictions.

Key aspects of the Arm’s Length Principle:

• Prices must reflect those found in transactions between independent parties.
• It applies to tangible and intangible assets, services, and financial transactions.
• Ensures fair taxation and compliance with local and international tax laws.

Webinar: Transfer pricing aspects of financial transactions

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Arm’s Length Methods of Transfer Pricing

To determine whether a transaction meets the Arm’s Length Principle, businesses use the following OECD-approved transfer pricing methods:

Challenges in Applying the Arm’s Length Principle

• Availability of Comparable Data
  Finding reliable third-party data is a common challenge, especially for businesses dealing in unique intangibles or highly customized services. 
• Valuation of Intangible Assets
  Intangible assets such as patents, trademarks, and brand equity present valuation difficulties as market comparables may be scarce. 
• Complexity in Multinational Transactions
  Businesses operating in multiple jurisdictions must align with diverse transfer pricing rules, increasing compliance complexity. 
• Risk of Double Taxation
  Tax authorities in different countries may disagree on the arm’s length price, leading to double taxation risks unless resolved through tax treaties or the Mutual Agreement Procedure (MAP). 

What our clients say about us

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Guided TP model improvement

Quantera has been with us since the start of the overhaul of our TP model. With the help of Quantera we were able to ask the right questions and also got the business thinking about where their value really sits. This journey has left us being much better in control. They maintain a good overview of outstanding issues and pro-actively contribute to resolve issues.

Jord Ruijgh

Head of Tax & Treasury at Meltwater

Cooperative global TP services

Quantera Global provides us with excellent transfer pricing services, which we use as part of our propositions towards our global clients. We appreciate their open and cooperative style of working together. They are always available to brainstorm on tp matters, discuss practical approaches and provide global insights.

Bart Le Blanc

Partner at Norton Rose Fulbright LLP

Timely project delivery

Quantera Global has assisted us in a transfer pricing documentation project that needed to be dealt with at a short notice. We appreciate their delivery capacity and proper and timely feedback.

Erwin Beermann

CFO at FibrXL

How Multinational Companies Ensure ALP Compliance

Maintaining Proper Documentation

Robust documentation is a core requirement of transfer pricing rules and your best defense in an audit. To demonstrate compliance, companies must prepare:

• Master File: Overview of group‑wide policies, intangibles, and financing arrangements
• Local File: Detailed breakdown of local entity’s related‑party transactions
• Country-by-Country reporting: High‑level allocation of income, taxes paid, and indicators of economic activity across jurisdictions

Timely, accurate reports not only satisfy regulators but also support internal governance and investor confidence.

Applying Strategic TP Measures

Conducting Benchmarking Studies: Regular benchmarking against industry peers ensures compliance and provides defensible pricing models for tax audits. 

Advance Pricing Agreements (APAs): Businesses can negotiate APAs with tax authorities to secure pre-approved transfer pricing methodologies, reducing audit risks. 

Internal Transfer Pricing Policies: A robust internal framework ensures consistent application of ALP across global subsidiaries. 

We are here if you need a:

Sparring partner

Sparring partner Many of our clients are experiencing various developments in their business. They like to have a sparring partner who understands their business and its position and who can provide pragmatic advice in a quick and efficient way by addressing only the needs of the company. We enjoy being a sparring partner and are […]

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Strategic sessions

In the strategic session, our experts gain a deep understanding of the composition and structure of your company, even in the most complex situations. Our team is specialised in understanding your business. The strategic session can focus on a specific topic you would like to focus on or your overall transfer pricing policy.

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Transfer pricing analysis

All transactions between related entities should be at arm’s length. This is a very important principle in international tax law. A transfer pricing analysis is required to determine the arm’s length price. The tp analysis will show whether there are opportunities and possible threats within the current transfer pricing policy.

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Regulatory Framework: OECD and Local Jurisdictions

• OECD Transfer Pricing Guidelines 

The OECD Guidelines provide a framework for applying ALP consistently across jurisdictions. The Base Erosion and Profit Shifting (BEPS) initiative aims to combat aggressive tax planning by requiring transparency in profit allocation. 

• Country-Specific Regulations 

Each jurisdiction has specific transfer pricing regulations that align with OECD principles but may impose additional documentation and reporting requirements. 

Examples: 

• United States: IRC Section 482 
• European Union: EU Joint Transfer Pricing Forum (JTPF) 
• India: Section 92A of the Income Tax Act