Arm's length principle

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The arm's length principle ( English principle arm's length , ALP) is a principle of international tax law , and states that in cross-border transactions between mutually related natural or legal persons or companies transfer prices should be fixed so as for a comparable transaction between independent Would be the case for third parties in an external market . Dealing at arm's length is a recognized principle for an exchange of services “as between independent parties”.

Consequences of non-compliance

If affiliated companies do not act according to this principle, this leads to a profit shift between the companies involved. The company that pays a higher transfer price than it would have had to pay on the market outside the group of companies for a comparable service shows a lower profit , the other company a higher profit than if the market prices were offset. Accordingly, taxes are too high for one company and too low for the other . In the case of cross-border groups ( multinational companies ), profits can be shifted from high-taxed to low-taxed countries in this way - with corresponding consequences for tax revenues in the countries concerned.

Business aspects

(Minority) shareholders of the companies involved are affected by a profit shift because they receive too low or too high a dividend compared to market prices . They have to accept these advantages or disadvantages, since the choice of location or the use of transfer pricing is the power of the board of directors . If shareholders do not agree with such decisions, they can criticize them in the general meeting or even refuse to discharge the board of directors .

Arm's length principle in double taxation agreements

The arm's length principle is also used in double taxation agreements . This is also the case in the model agreement of the OECD (OECD-MA), which many countries use as the basis for concluding their double taxation agreements.

According to Article 7, Paragraph 2 of the OECD-MA , the relationship between different permanent establishments or between a permanent establishment and the head office must be designed in accordance with the arm's length principle. The same applies to group companies (Art. 9 Paragraph 1 OECD-MA) and if this is not followed, the profits can be attributed to the other company and taxed. Transfer prices are therefore of great relevance between group companies . Determining transfer prices is very complex, which is why the OECD published the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2010.

The arm's length principle must also be taken into account with regard to interest (Art. 11 para. 6 OECD-MA) and license fees (Art. 12 para. 4 OECD-MA) between parties with “special relationships”.

Arm's length principle in Germany

In Germany income of a taxpayer from a business relationship for abroad with him diminished by close person that he, based on sets of his income determine other conditions, especially prices than they would have agreed under the same or comparable circumstances independent third parties, its income without prejudice to apply other regulations as they would have accrued under the conditions agreed between independent third parties ( Section 1 (1) Foreign Tax Act, AStG). If taxpayers observe the Federal Ministry of Finance's letter of principles for examining the accrual of income between related parties with cross-border business relationships with regard to investigation and cooperation obligations, corrections and mutual agreement and EU arbitration proceedings , there will be no correction of the income according to § 1 AStG.

See also

Individual evidence

  1. ↑ OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2010. (PDF) In: oecd-ilibrary.org. Retrieved August 7, 2018 .
  2. ↑ Federal Ministry of Finance: Principles for examining the differentiation of income between related parties with cross-border business relationships with regard to investigation and cooperation obligations, corrections as well as mutual agreement and EU arbitration. (PDF) Retrieved February 15, 2014 .

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