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8/24/2012

Arm’s Length Principle - Terminology [in (Malaysian) IRBM Transfer Pricing Guideline 2012]


Comparing to the IRBM Transfer pricing guideline announced dated 2 July 2003, IRBM Transfer Pricing Guideline 2012 stated a more details and clear guidance on arm’s length principle ought to be adopted. We are here to further discuss the arm’s length principle by explaining on relevant terminology used.


a.   Terminology Determination

Arm’s length price: 
Starting from Section 140A(2) of Income Tax Act 1967.

Subject to subsections (3) and (4), where a person in the basis period for a year of assessment enters into a transaction with an associated person for that year for the acquisition or supply of property or services, then, for all purposes of this Act, that person shall determine and apply the arm’s length price for such acquisition or supply.

The term “”arm’s length price” in used meaning been identifying as:

Arm’s length price is the price, which would have been determined if such transactions were made between independent entities under the same or similar circumstances.

[Para 6.1]

Article 9 of the OECD Model Tax Convention - ASSOCIATED ENTERPRISES

1. Where
 a) an enterprise of a Contracting State participates directly or indirectly in the management, control or capital of an enterprise of the other Contracting State, or 
 b) the same persons participate directly or indirectly in the management, control or capital of an enterprise of a Contracting State and an enterprise of the other Contracting State,

and in either case conditions are made or imposed between the two 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.
Article 9 - Articles of the Model Convention

Hypothesis assumption:-

-       When associated persons enter into a transaction, the element of control which one party has over the other may exist.
-       associated persons not dealing at arm's length as if they operate as separate entities
-       is generally based on a comparison of: -
a. prices, margins, division of profits or other indicators of controlled transactions; with
b. prices, margins, division of profits or other indicators of uncontrolled transactions. 



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