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Category: Arm’s Length Principle

The authoritative statement of the arm’s length principle as used in transfer pricing is found in paragraph 1 of Article 9 of the OECD Model Tax Convention, which forms the basis of bilateral tax treaties involving OECD member countries and an increasing number of non-member countries.

Article 9 provides: [Where] conditions are made or imposed between the two [associated] 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 analysis required to apply the arm’s length principle on controlled transactions is referred to in the transfer pricing guidelines as a comparability analysis. See TPG 1.6.

European Commission vs Belgium and Ireland, February 2019, General Court Case No 62016TJ0131

In 2016, the Commission requested that Belgium reclaim around €700 million from multinational corporations in what the Commission found to be illegal state aid provided under the Belgian “excess profit” tax scheme. The tax scheme allowed selected multinational corporations to exempt “excess profits” from the tax base when calculating corporate tax in Belgium. The European Court of Justice concludes that the Commission erroneously considered that the Belgian excess profit system constituted an aid scheme and […]

Switzerland vs S SA, Dec 2018, Swiss Federal Supreme Court, Case No 2C_11/2018

The Swiss company S SA is involved in the manufacturing and distribution of pharmaceutical and chemical products. S SA is part of multinational group with a parent company in the Netherlands, N BV, and subject to a royalty payments equal to 2.5% of its turnover for using the results of R&D activities conducted by a French sister company F SAS. The R&D activities were performed by F SAS and remunerated with a cost (plus 15%). […]

Denmark vs Water Utility Companies, November 2018, Danish Supreme Court, Case no 27/2018 and 28/2018

These two triel cases concerned the calculation of the basis for tax depreciation (value of assets) in a number of Danish Water utility companies which had been established in the years 2006 – 2010 in connection with a public separation of water supply and wastewater utility activities. The valuation of the assets would form the basis for the water utility companies’ tax depreciation. The transfer was controlled and subject to Danish arm’s length provisions. The […]

Malawi vs Eastern Produce Malawi Ltd, July 2018, Malawi High Court, JRN 43 af 2016

Eastern Produce Ltd is part of Camellia Plc Group, and is is engaged in the growing, production and processing of tea in Malawi. The Malawi tax administration conducted a tax audit and found that transfer prices for intergroup service transactions had not been at arm’s length. However, in the notifications to Eastern Produce Ltd. no reference was made to the local arm’s length regulations – only the OECD Transfer Pricing Guidelines. Eastern Produce Limited complained to the High […]

Norway vs. Exxonmobil Production Norway Inc., January 2018, Lagsmanret no LB-2016-160306

An assessment was issued by the Norwegian tax authorities for years 2009 2010 and 2011 concerning the interest on a loan between Exxonmobil Production Norway Inc. (EPNI) as the lender and Exxon Mobile Delaware Holdings Inc. (EMDHI) as the borrower. Both EPNI and EMDHI are subsidiaries in the Exxon Group, where the parent company is domiciled in the United States. The loan agreement between EPNI and EMDHI was entered into in 2009. The loan had […]

Europe vs Hamamatsu, Dec 2017, European Court of Justice, Case No C-529-16

The case concerns the effect of transfer pricing year-end adjustments on VAT – the relationship between transfer pricing and the valuation of goods for customs (VAT) purposes (Hamamatsu case C-529/16). Hamamatsu Photonics Deutschland GmbH (Hamamatsu) is a German subsidiary of the Japanese company Hamamatsu, and it acts as a distributor of optical devices purchased from the parent company. The transfer pricing policy of the group, which is covered by an Advanced Pricing Agreement (APA) with […]

Spain vs. Afinsa and Filatelico, Nov. 2017, Supreme Court, Case no 4008/2017

The Supreme Court of Spain ruling in the Afinsa Tangibles SA stamp-fraud case – a pyramid scheme that cheated 350,000 people out of billions of dollars. One of the biggest fraud cases in the history of Spain. In May 2016, the head offices of two investment firms, Forum Filatelico and Afinsa Tangibles, were sealed off by 300 police officers who seized documents, bundles of banknotes worth €10 million and various works of art. The directors […]

OECD Transfer Pricing Guidelines 2017 – New version

OECD Transfer Pricing Guidelines 2017 – New version The OECD Transfer Pricing Guidelines for Multinational Enterprise and Tax Administrations provide guidance on the application of the “arm’s length principle”, which is the international consensus on transfer pricing, i.e. on the valuation for tax purposes of cross-border transactions between associated enterprises. In a global economy where multinational enterprises (MNEs) play a prominent role, transfer pricing continues to be high on the agenda of tax administrations and taxpayers […]


In this case the US Tax Court held that a closing agreement did not result in retroactive indebtedness. Analog Devices Corp. repatriated cash dividends from a foreign subsidiary and claimed an 85% dividends received deduction for FY 2005, cf. US regs § 965. No related party indebtedness was reported by the company which would have limited the deduction available. During the audit of Analog Devises Corp. the IRS claimed that a 2 pct. royalty from the subsidiary […]

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