3 Practical Application of the Arm’s Length Principle

Subject(s):

Formation of contract — Interpretation of contract — Performance of contract — Payment of price — Modes of payment

This chapter provides a general summary of transfer pricing practices prior to the Base Erosion and Profit Shifting (BEPS) Project. The summary is based primarily on the principles and concepts contained in the 2010 version of the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines and in the 2013 UN Manual. The chapter first describes the general process of conducting a transfer pricing analysis. Thereafter, the application of that process in two especially difficult situations, those involving intangibles and services, is examined. The chapter then describes the current application of the ALP to permanent establishments (PEs). Finally, this chapter concludes with some comments on the prevalence of disputes relating to the ALP.