Practical Difficulties In Application of Arm’s Length Price

Practical Difficulties In Application Of Arm’s Length Price, Transfer pricing is an important and developing area for the Practicing Chartered Accountants.

CA Ridhi Dhoot

Arms Length Price

Practical Difficulties In Application Of Arm’s Length Price,Transfer pricing is an important and developing area for the Practicing Chartered Accountants. But certain problems are faced by them in determining the Arm’s Length Price. Let us have a look on the problems faced while determining the ALP. Now You can scroll down below n check more details regarding “Practical Difficulties In Application of Arm’s Length Price”

Practical Difficulties In Application of Arm’s Length Price

Non – Availability of Market Price

There must be a reasonably reliable and comparable uncontrolled market price. The ALP does not meet this condition because of the nature of the market place. A market price is an outcome of unique negotiations. It may be possible to know the price range, but it is very difficult to know the actual market price unless a market transaction actually takes place.

Non – Availability of Data and Unreliable Data

There may be difficulty in getting adequate and reliable information and data in order to apply Arm’s Length Principle. The comparison of controlled and uncontrolled transactions between associated and independent enterprises usually requires a large quantum of data. Easily accessible information may be incomplete and difficult to interpret while the relevant and required information may be difficult to be obtained due to geographical constraints or confidentiality aspects. Due to these difficulties, the tax administration department and tax payers may have to exercise reasonable judgment when applying the ALP.

True Comparison difficult in Certain Cases

The commercial and financial conditions governing a transaction between independent enterprises are, by and large, never similar to those existing between associated enterprises. As a result, there cannot be a true comparison. The economies of scale and integration of various business activities of the associated enterprises may not be truly appreciated by ALP. Further, associated enterprises may enter into transactions which independent enterprises may not enter into, like say, licensing of valuable intangibles or sharing the benefits of research. Further, there is no risk to the overall groups profit from a transaction of this kind between the members of a MNC group. In such situations, where independent enterprises seldom undertake transactions of the type entered into by associated enterprises, the ALP is difficult to apply because there is a little or no direct evidence of what conditions would have been established by Independent Enterprises.


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Absence of comparable market price for “intangible” transactions

The ALP reaches a comparable uncontrolled market price that is reasonably reliable for standard transactions where the price range is narrow and the market price is certain. However, the ALP generally fails to achieve a comparable market price for transactions involving intangibles because they are unique. The unique nature of these transactions creates a very wide price range.

Administrative Burden – In certain cases, the arms length principle may result in an administrative burden for both the taxpayer and the tax administration department for the evaluation of significant numbers and types of cross-border transactions.

Time lag Although an associated enterprise normally establishes the conditions for a transaction at the time it is undertaken, at some point the enterprise may be required to demonstrate that these are consistent with the arms length principle. The tax administration may also have to engage in the verification process perhaps some years after the transactions have taken place. It may result in substantial cost being incurred by the tax payer and the tax administration. It is also difficult to appreciate the business realities which prevailed at the time when the transactions were entered into. This may lead to bias against the tax payer.

In spite of the practical difficulties listed above, OECD member countries are of the view that the ALP does provide a sound basis to appreciate the transfer pricing between associated enterprises. It has so far provided acceptable solutions to both taxpayers and the tax administrations. The experiences gained so far should be effectively used to remove the practical difficulties and improve the administration.

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CA Ridhi Dhoot

The writer is a Chartered Accountant & a Licentiate Company Secretary. You can reach out to her at

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