Establishing an arm's length price

By Tolley in association with Robert Langston of Saffery Champness

The following Corporation Tax guidance note by Tolley in association with Robert Langston of Saffery Champness provides comprehensive and up to date tax information covering:

  • Establishing an arm's length price
  • Arm’s length principle
  • Traditional transactional methods
  • Transactional profit methods

Arm’s length principle

The arm’s length principle is generally applied by comparing a controlled transaction (ie the transaction between the connected parties) with uncontrolled transactions (ie transactions between independent parties).

The OECD Guidelines categorised methods for establishing the arm’s length price into two groups:

  • traditional transactional methods
  • transactional profit methods

UK law does not set out any order of preference for the methods set out in the OECD Guidelines, but the Guidelines say that the most appropriate method should be selected which provides the best estimate of an arm’s length price. The Guidelines previously established a hierarchy in which the methods should be considered but this was removed in the 2010 update.

This comparison of the controlled and uncontrolled transactions would be documented, and the chosen method justified, in the transfer pricing documentation. For example, documentation may include a benchmarking of similar transactions between third parties.

For more information, see the Documentation requirements guidance note.

Traditional transactional methods
Comparable uncontrolled price (CUP) method

The CUP method compares the price charged for property or services transferred in a controlled transaction to the price charged for the same goods or services in an unc

More on Transfer pricing and profit fragmentation: