Transfer Pricing Issues – the Arm’s Length Principle

Abstract

As the globalization process and international trade has taken off, the number of multinational groups significantly increased. Especially for the past century. In this regard, it is important to address the consequences for the MNEs as well as for national tax authorities. Since, the topic of transfer pricing has become the top priority on the tax authority’s agenda it is important to highlight the issues found within the documentation of transfer pricing, such as the arm’s length principle. This paper provides an overview on the main considerations on the arm's length principle: applying steps, arm’s length price determination, main issues encountered in tax practice. The paper is based on qualitative research according to the field literature/legislation as well as the author’s practical perspective. As the results have shown there are several issues within the arm’s length principle, more specifically: differences identified between controlled and uncontrolled transactions; identifying and applying reasonable search criteria in a specialized database; identifying comparable and independent companies suitable as benchmarks for comparability analysis; identifying a reasonable sample of comparable to determine the arm’s length range; identifying and applying the most appropriate transfer pricing method. That’s why it is fundamental to ensuring equitable taxation across borders, fostering openness in related-party transactions, and protecting national tax resources from erosion due to unlawful profit shifting by multinational corporations. UDC: 336.22:339.92; JEL: H25, H26