The arm’s length standard is the international standard typically used to set transfer prices between related parties. Under the arm’s length standard, the income for a transaction between related parties should be the same as if unrelated taxpayers had engaged in the same transaction under comparable circumstances. The key concept underlying the application of the arm’s length standard is “comparability” – the comparison of the conditions in a controlled transaction with the conditions in transactions between independent enterprises.
|OECD Guidelines||482 Regulations|
|Functional analysis||Functions performed by each party|
|Business strategies||Risks assumed by each party|
|Contractual terms||Contractual terms|
|Economic circumstances||Economic conditions|
|Characteristics of property or services||Similarity of product or service|
To evaluate comparability, the OECD Guidelines and 482 Regulations require an analysis of all factors that could affect prices or profits in uncontrolled transactions. Comparability factors discussed in the OECD Guidelines and 482 Regulations are similar, as shown in the table above.
The OECD Guidelines and 482 Regulations do not require that controlled and uncontrolled transactions be identical in all of these five dimensions—only that there is sufficient similarity to make the comparison meaningful. If adjustments need to be made to make the comparison more reliable, they are to be made on a uniform basis.