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ACCA Strategic Professional · Advanced Financial Management · Dividend policy in multinationals and transfer pricing

Which of the following best describes the arm's length principle in the OECD transfer pricing guidelines?

The arm's length principle requires that prices on transactions between related group entities be set as independent parties would have agreed in comparable circumstances. It is the basis of OECD guidelines and allows tax authorities to adjust prices that depart from it.

  1. ARelated entities must price intra-group transactions as independent parties would in comparable circumstancesCorrect
  2. BIntra-group prices must always equal the full absorption cost of the seller
  3. CTransfer prices must be set by the tax authority of the buyer's country
  4. DIntra-group prices must be identical in every country in which the group operates

Explanation

The arm's length principle requires that conditions of controlled transactions be those that would have applied between independent enterprises. Cost-based prices may be used only as a method where appropriate, not as a rule.

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