Reassessing the Arm’s Length Principle in Transfer Pricing Regulation

Abstract

The arm’s length principle (ALP) has long been considered the cornerstone of Volume 6, Issue 1 international transfer pricing regimes. Originating from Article 9 of the OECD Model Tax Convention, the ALP aims to ensure that transactions between Publication history: related entities reflect market conditions as if undertaken by independent Accepted on 4 March 2025; enterprises. This article critically examines the doctrinal, institutional, and Published: 9 March 2025 practical dimensions of the ALP, particularly within the context of developing economies such as Zambia. While the ALP underpins Zambia’s transfer pricing Article DOI: regulatory framework, significant concerns remain regarding its conceptual 10.59413/ajocs/v6.i.1.18 robustness, administrative enforceability, and susceptibility to manipulation by multinational enterprises (MNEs). The study evaluates the OECD's comparability analysis, the best-method rule, and the documentation requirements that form the procedural backbone of the ALP. It also explores prominent criticisms—including the principle's reliance on comparable transactions, its administrative burden, and its inadequacy in addressing complex intra-group transactions involving intangible assets or work-in-process inventories. Drawing on legal, economic, and policy perspectives, this paper contributes to the scholarly debate on whether the ALP remains a viable mechanism for equitable taxation in global commerce or whether alternative paradigms are necessary.