Transfer Pricing: The arm's length principle

Our Tax Team analyses the OECD perspective on the application of the arm’s length principle to intercompany transactions. This has long been the guiding principle in the area of transfer pricing among OECD countries, including Malta. Transfer pricing refers to the terms and conditions surrounding transactions between associated enterprises forming part of a multinational enterprise (MNE) group and, in accordance with international standards, the individual group members of the MNE must be taxed on the basis that they act at arm's length in dealings with each other. Under the arm’s length principle (ALP), MNE groups must apply the same conditions to their transactions as those that independent parties would apply under similar circumstances.

 

In recent years, intercompany transactions have gained considerable attention from tax authorities around the world, as evidenced by the increasing volume of transfer pricing case law.. In fact, tax authorities around the world have become more sensitive to the mispricing of intercompany transactions, which can lead to the shifting of profits from one country to another country.

 

OECD's BEPS Action Plan

At the same time, the OECD, through its BEPS Action Plan, has also put important focus on intercompany transactions. In BEPS Action 4, the OECD addresses the issue of interest deduction used by MNEs to achieve base erosion in high-tax jurisdictions by providing a set of rules to combat such practice.

 

Years of debate about alternatives to the ALP have led to the ALP being reinforced during the 2015 OECD Base Erosion and Profit Shifting Project (BEPS Project). The OECD countries concluded that the ALP has proven useful as a practical and balancing standard for tax administrations and taxpayers to evaluate transfer prices and to prevent double taxation. However, the OECD countries have also recognized that the existing guidelines are vulnerable to manipulation.n Furthermore, in BEPS Actions 8-10, the OECD has done some considerable work to improve the transfer pricing guidelines with the aim to tax profits where value is really created.

 

BDO Malta in Tax

BDO Malta serves clients on an international level as they navigate an increasingly complex tax landscape. Our tax professionals draw on deep experience and industry-specific knowledge to deliver clients the insights and innovation they need to maintain compliance and drive value – wherever they do business. Our transfer pricing professionals help you develop transfer pricing policies that ensure profit allocation based on the functions, assets and risks assumed, while minimising the likelihood that you will be subject to tax adjustments and penalties. Our tax professionals work closely together, so we bring the knowledge from across BDO to all our engagements – whether you’re a multinational, a privately held business or
a private individual.

 

This article was a joint effort of BDO Malta Tax Partner Josef Mercieca, Tax Manager Milena Palikarova and it first appeared in the Malta Stock Exchange Business Review 2022 

 

Publication date: 01/10/2022