The ALP mandates that cross border transactions involving related parties should be carried out as if they were separate entities.
Characteristics of the ALP
- Minimizes transfer pricing manipulation by requiring conditions and financial results akin to comparable market deals
- OECD Guidelines outline five methods analyzing pricing between affiliates vs. third parties
- Transactions deemed ALP-compliant are taxed according to functions/risks/assets in each jurisdiction
- Stringent documentation demonstrating arm’s length dealings required in audits
ALP Example
Tax authorities disputed royalty fees an auto group paid subsidiaries for shared technology, finding market research supported lower amounts absent influence between related parties.
ALP Considerations
As globalization and complexity increase, interpreting comparability and applying the ALP grows challenging, although its underpinnings remain fundamental to curbing double taxation and BEPS.