EXAMINATION OF THE CHALLENGES OF REPLACING THE ARM’S LENGTH PRINCIPLE WITH FORMULARY APPORTIONMENT AS STANDARD FOR ASSESSING TRANSFER PRICING.
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Date
2020
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Department of Jurisprudence and International Law, University of Ilorin.
Abstract
The Arm’s Length Principle (ALP) is the cornerstone of the current transfer pricing
regulation as recommended by both the Organisation for Economic Cooperation and
Development (OECD) and the United Nations (UN).The application of ALP is predicated on
treating members of a Multinational Corporation (MNC) Group (that is, the parent company
and its subsidiaries)as separate legal entities and using the prices charged in a transaction
between independent entitiesin an open marketto determine or benchmark the appropriate
price to be charged in a transaction among the members of the MNC group. The application
of the ALP looks straight forward in theory and it was considered as the best possible
standard to assess and regulate transfer pricing. However, with the advent of globalization
and with the introduction of sophisticated communication systems and advanced high speed
information technologies, the practical application of the ALP became a difficult and
herculean task. This has provoked a lively debate and arguments for the replacement of the
ALP with the Formulary Apportionment which is held to be more suitable for the new
globalized economy. The objective of this paper is to examine the application of the ALP and
its challenges in the new globalized economy. The paper considers the application of the
Formulary Apportionment as well as its prospect and challenges in replacing the ALP as the
international standard for assessing transfer pricing.
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Citation
Journal of International and Comparative Law (JICL). 8: 20-37