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Transfer Pricing
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The Arm’s Length Principle
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When the Organization for Economic Cooperation and Development (OECD) published
its first major work on the topic of transfer pricing in 1979, it made reference
to what had become the pivotal point around which all transfer pricing discussion
revolves, namely the arm’s length principle.
All definitions of the arm’s length principle aim at determining the “fair” or “uncontrolled
market” price.
For example, Black’s Law Dictionary makes reference to:
“a transaction negotiated by unrelated parties, each acting in his or her own self-interest”;
“the basis for a fair market determination”;
“a transaction in good faith in the course of business by parties with independent
interests”.
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Payments to a Related Party in a Low-Tax Jurisdiction
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The perception exists, at the level of the Revenue, that transactions involving
related offshore entities are often motivated by tax, rather than strictly commercial,
reasons. The OECD International Transfer Pricing Guidelines emphasize that taxpayers
should be aware that Revenue Services worldwide may pay closer attention to a transaction
involving an entity resident in a country with lower tax rates than in the home
country.
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Prev - The Context of the Problem
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