The tax authorities are not convinced that Pierre Plastic complies with transfer pricing laws. It intends to examine (i) whether the allocation of risks, assets and functions on which transfer pricing agreements were based is consistent with actual agreements and (ii) whether the associated companies have agreed to the transfer pricing agreements. Without intercompany agreements, Pjotr Plastic must now provide further evidence and convince the tax authorities that its transfer pricing position is in fact what it claims – potentially a lengthy and costly discussion. It could have been avoided… The arm length principle (ALP) is the condition or fact that the parties to a transaction are independent and equal. Such a transaction is called an “arm-length transaction.” As a general rule, family members and businesses with related shareholders do not sell in arm length; On the contrary, transactions between them are transactions that are not poor. A non-arm-length transaction, also known as an arm-in-arm transaction, refers to a transaction in which the buyer and seller have an identity of interest; In short, buyers and sellers have an existing relationship, whether commercial or personal. The OECD`s model tax convention provides a legal framework for governments to get their fair share of taxes and businesses to avoid double taxation of their profits. The arm length standard is critical to the amount of profits that should be attributed to a company and, therefore, the size of a country`s tax liability on that unit. The OECD has developed in-depth guidelines for the application of the principle of weapons length in this context. Under this approach, a price is considered reasonable if it falls within a price range charged by independent parties trading arms. This is generally defined as a price that an independent buyer would pay an independent seller for an identical item on identical terms if neither is forced to act. Intercompany agreements can cover different controlled transactions. Below, we give a common overview: an arm-length relationship differs from a fiduciary relationship in which the parties are not on an equal footing, but existed asymmetries of power and information. The principle of arm length indicates that a business relationship between two parties is concluded against perfectly normal market prices and general bargaining conditions. It refers to the test applied by the national tax authorities to ensure that the taxable unit does not avoid tax. In business-to-business relationships, it may be worthwhile to apply transfer pricing structures that lead to a fiscally optimistic business structure, which is most beneficial to the parent company`s shareholders.
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