The World Customs Organization (WCO) and the World Trade Organization (WTO) have adopted the arm`s length principle in customs valuations. The Article VII Implementation Agreement (known as the WTO Customs Valuation Agreement or “Customs Valuation Agreement”) ensures that the determination of the customs value for the application of customs duties to imported goods is neutral and uniform and excludes the use of arbitrary or fictitious customs values. [5] [6] If your business consists of multiple legal entities, these companies often transfer goods, services, and intellectual property to each other. If this is the case in your organization, you must ensure that these transactions are made under market conditions. This is essential to ensure that your business is tax compliant. But what does “arm`s length” mean? What is an arm`s length transaction? Read on for an arm`s length definition, why it`s important, and how to calculate the arm`s length price for your intercompany transactions. As long as you have access to reliable comparable data, the UPC method is considered the most direct way to apply the arm`s length principle. It analyses the royalty rates set in comparable licensing agreements between independent companies and uses them as a starting point for setting fair transfer prices for the intercompany transactions analysed. These concerns prompted the OECD to open a Base Erosion and Profit Shifting (BEPS) investigation. As part of the BEPS project, the OECD has published new detailed guidance on the interpretation of the arm`s length principle, on the documentation needed to support transfer pricing between controlled subsidiaries and on transfer pricing dispute settlement approaches. If you are still wondering “What is a transaction under market conditions?”, here is a (made-up) example: The valuation is carried out by means of an economic and legal comparability analysis to verify whether or not the subsidiaries comply with the arm`s length principle. In other words, ensure that affiliates accept their transactions, as independent companies would in comparable circumstances.

On 3 June 2020, the OECD Centre for Tax Policy and Administration, Committee on Fiscal Affairs, Working Party No. 6, sent a questionnaire to businesses (see CTPA/CFA/WP6/NOE2(2020)6) and requested comments on the application of the arm`s length principle in the global economy affected by COVID-19. The introduction of this questionnaire (page 2) anticipates some of the challenges for the future: at its most basic level, the arm`s length principle states that the price charged in a transaction between two independent parties must be the same as the price charged in a comparable transaction between two unrelated parties. As a simple example, a company that produces ethanol would have to pay the same price to a farm that owns it as it does to unrelated farmers. You may have heard of the “arm`s length principle.” But what does this really mean? This short article explains it in more detail. Many multinational enterprises have structured their operations in such a way as to respect the arm`s length principle by organizing networks of “lead companies” and “routine companies”. In such structures, the main companies enter into inter-company agreements that oblige them to perform important entrepreneurial functions and bear entrepreneurial risks in exchange for the entrepreneurial profits and losses of the global company. Routine enterprises enter into inter-company agreements that oblige them to perform manufacturing, distribution or service functions and do not bear entrepreneurial risks in exchange for the realization of routine profits (or sometimes losses) determined by reference to comparable enterprises. Globally, TP audits conducted over the next few years are likely to test the importance of the arm`s length principle by raising the following questions: Arm`s length transactions are commonly used in real estate transactions because the sale affects not only the people directly involved in the transaction, but also other parties, including lenders. With the OECD`s ongoing work on BEPS and the increasing involvement of other organisations such as the United Nations, tax authorities have reconsidered this principle and its application. .

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