International Journal of Law

Authors
Ambareen Beebeejaun

Abstract
The aim of the research paper is to analyse the feasibility of applying the arm’s length principle (ALP) in the international sphere. ALP is a concept introduced by OECD for intra-firm trade especially in cross-border transactions. In the pursuit of profit maximisation, multinational enterprises engage in the process of profit-shifting to low tax based jurisdictions and this involve the manipulation of prices which they charge to affiliated companies situated in other countries. Therefore, the ALP is being used as a tool to avoid harmful transfer pricing practices. This paper will demonstrate the extent to which a complete harmonization of the ALP across the globe is unattainable. The methodology adopted for the study comprises of the black letter approach for the purpose of illustrating the ALP and the OECD guidelines on the application of the principle. Thereafter, a comparative analysis is carried out to demonstrate the United States (US) divergence to the ALP further to the development of their own transfer pricing rules. This research paper sets out the main reasons behind some countries divergence to the ALP as brought forward by OECD, especially the lack of binding force of law of the OECD guidelines on OECD member countries, the theoretical shortcomings of the ALP and the bias of some governments about multinationals being tax evaders. The paper concludes that a complete harmonisation of transfer pricing rules including the ALP is almost impossible to attain and portrays the US preference for profit-split methods which resembles the formulary apportionment method over traditional transactional methods.