Arm’s-Length Principle

The typical multinational is an integrated operation: Its subsidiaries are beneath popular manage and share popular resources and objectives. The really need to declare taxable revenue in distinctive nations suggests that multinationals have to allocate revenues and expenditures among subsidiaries and set transfer rates for intrafirm transactions.

Tax authorities worldwide have created difficult transfer-price and revenue allocation regulations as a element of their national revenue tax systems. Most are depending on the arm’s-length principle, which rates intrafirm transfers as if they took spot amongst unrelated parties in competitive markets.16 The OECD identifies quite a few broad procedures of ascertaining an arm’s-length price tag. Resembling those specified by Section 482 with the U.S. Internal Income Code, they may be (1) the comparable uncontrolled price tag process, (2) the comparable uncontrolled transaction process, (3) the resale price tag process, (4) the cost-plus process, (5) the comparable profit process, (6) the profit split process, and (7) other procedures.