![]() This will entail extensive bargaining between Company A and its suppliers. Under an arm's length transaction, Company A would make the best effort to obtain its raw material at the lowest price possible in order to minimise its costs and maximise its profits. While independent enterprises are concerned with maximizing individual profits, by aiming for the lowest costs and highest returns, an MNE Group is concerned with overall group profits which may result in unequal distribution of profits within the group.Īn example to illustrate the difference between controlled and uncontrolled transactions is as follows:Ĭompany A purchases raw material to make furniture. Unlike independent companies, multinational corporation group or multinational enterprises (hereinafter referred to as an "MNE Group") usually operate based on its own set of conditions which normally do not reflect the market forces. Under this circumstance, bargaining power rarely comes into play. When associated persons enter into a transaction, the element of control which one party has over the other may exist. conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly." The arm`s length principle is stated in paragraph 1 of Article 9 of the OECD Model Tax Convention as: Arm's length price is the price which would have been determined if such transactions were made between independent entities under the same or similar circumstances. ![]() According to the arm's length principle, a transfer price is acceptable if all transactions between associated parties are conducted at arm's length price. This is consistent with the objective of minimizing the possibility for double taxation. The arm`s length approach, which is internationally accepted as the preferred basis for determining the transfer price of a transaction between associated persons, will be the basis adopted by IRBM.
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