The OECD principles on international transfer pricing include a key principle termed the ‘arm’s-length principle’. This principle requires multinational firms engaging in transfer pricing to treat price as if the transaction were made to an unrelated party at ‘arm’s-length’. The idea of the principle is to ensure no state loses out on tax revenues. In August 2010, the South African Revenue Services (SARS) introduced an arm’s-length approach to its tax code effective October 2011. The new legislation requires taxpayers to conduct an arm’s-length test and adjust prices if required. This is a big change for companies in South Africa as the existing legislation required SARS to make a ruling on whether or not a transaction could be considered arm’s-length. The new arm’s-length rules also apply to firms with thin capitalization.This refers to firms with low equity and high debt – the debt usually given by a parent or related firm at a lower than market rate.

Questions 

1 Do you think it is always possible to establish an arm’slength/

market price?

2 Would an arm’slength price be more difficult to establish in the provision of services?