Roadmap for Determining the Arm Length Price

1.    Introduction

An arm’s length transaction, also known as the arm’s length principle (ALP), indicates a transaction between two independent parties in which both parties are acting in their own self-interest.

This article outlines the significance of ALP and the steps to be adopted for determining the ALP.

2.    Significance of ALP

                           i.          Prevents tax evasion.

                         ii.          Reflects fair market valuation.

                       iii.          Reduces tax disputes.

                       iv.          Enhances global transparency.

                         v.          Facilitates cross-border trade.

                       vi.          Promotes economic fairness.

3.    Steps to arrive at ALP

          Step 1- Identifying related parties/ connected persons

          Step 2- Accurate delineation of transactions

          Step 3- Performing a comparability analysis

          Step 4- Functions Assets and Risks Analysis

          Step 5- Selection of Most appropriate transfer pricing method

          Step 6- Selection of tested party

          Step 7- Comparable uncontrolled transactions

          Step 8- Comparability adjustments

          Step 9- Determining the arm’s length range

4.    Key takeaways

• The determination of an ALP of a related party transaction or arrangement requires a meticulous analysis of related parties, transactions, and market conditions.
• The functions, assets, risks analysis and comparability analysis forms the core of the ALP determination and must be given utmost importance.
• Identification of comparable uncontrolled transactions requires a skilled and knowledge personnel.