Arms length price
Arms length price it is the principle of pricing in international transactions that relates to market prices. All transactions are on the same terms. All companies using this rule are divided into groups setting their own prices. Establishing such a rule allows tax authorities to treat companies related to each other equally. Of course, they always refer to market prices[1].
International tax law
The arms-length price was developed by the OECD (The Organisation for Economic Co-operation and Development) and approved by G20 (Group of Twenty). The OECD (The Organisation for Economic Co-operation and Development) applies a principle that ensures that inter-market transactions refer to market value. Such actions allow partial prevention of assets being transferred to the countries with the lowest taxes. It also allows that during the transaction prices should be the same even if in a given group companies would not be related to each other. Such arrangements help to unify the competition system. It protects both consumers and sellers and helps governments to control subordinate institutions[2].
The OECD (The Organisation for Economic Co-operation and Development) has introduced a market standard that has allowed prices to be set. In a given market situation, an indicator has been established for a specific entity, thanks to which it is possible to categorize the appropriate price for a given transaction by specifying specific conditions for relevant parties. At the same time, neither party is obliged to perform the transaction despite the agreed conditions.
Individual transaction structures can be divided into individual stages sanctioned by the OECD (The Organisation for Economic Co-operation and Development) because in each transaction we can distinguish specific stages.
Transaction structures[3]:
- Restructuring
- Primary valuation adjustments
- Corresponding adjustments
- Secondary adjustments
This institution has the right to impose regulatory obligations on governments to which they must comply. Thanks to this regulation are more concise and common. This regulation also protects companies against double taxation and fair taxation by the government.
Examples in contract law
Nowadays, averaged valuations are used in many areas and categories. If parents want to sell the property to children, they want to do it at a good price. Unfortunately, it may be considered by the Court as a donation because of the reduced market price. This can easily be avoided if we employ a third party for the entire project. This minimizes the risk of undesirable consequences. The entire transaction takes place on the public market, so it is regulated by market-based factors determined from above.
The baker produces baked goods, which he sells on the market at a reasonable price. He said that he would create baked goods from the leftovers and distribute to poor people. Unfortunately, they take into account all the requirements can not provide a donation because it is not in line with general market regulations. In spite of his charity, the baker cannot give away products for free because market practice is not allowed, which is strictly regulated by the government.
Footnotes
| Arms length price — recommended articles |
| Mercantile law — Value added tax — Trade exchange — Conditions of sale — Unfair competition — Export license — Exemption clause — Imperfect information — Shareholders Agreement |
References
- Bullen A., (2011), Arm’s Length Transaction Structures, IBFD, Amsterdam, The Netherlands.
- Markham M., (2005), The Transfer Pricing of Intangibles, Kluwer Law International B.V., The Netherlands.
- Wittendorff J., (2010), Transfer Pricing and the Arm's Length Principle in International Tax Law, Kluwer Law International B.V., The Netherlands.
Author: Kacper Chmarzyński
