Arm’s Length Principle – Article 34 – Corporate Tax Law

Article 34 – Arm’s Length Principle

1. In determining Taxable Income, transactions and arrangements between Related Parties must meet the arm’s length standard as specified in Clauses 2, 3, 4 and 5 of this Article and any conditions that may be prescribed in a decision issued by the Authority.

2. A transaction or arrangement between Related Parties meets the arm’s length standard if the results of the transaction or arrangement are consistent with the results that would have been realised if Persons who were not Related Parties had engaged in a similar transaction or arrangement under similar circumstances.

3. The arm’s length result of a transaction or arrangement between Related Parties must be determined by applying one or a combination of the following transfer pricing methods:

1. The comparable uncontrolled price method.
2. The resale price method.
3. The cost-plus method.
4. The transactional net margin method.
5. The transactional profit split method.

4. The Taxable Person may apply any transfer pricing method other than the methods listed in Clause 3 of this Article where the Taxable Person can demonstrate that none of the above methods can be reasonably applied to determine an arm’s length result and that any such other transfer pricing method used satisfies the condition of Clause 2 of this Article.

5. The choice and application of a transfer pricing method or combination of transfer pricing methods under Clause 3 or 4 of this Article must be made having regard to the most reliable transfer pricing method and taking into account the following factors:

1. The contractual terms of the transaction or arrangement.
2. The characteristics of the transaction or arrangement.
3. The economic circumstances in which the transaction or arrangement is conducted.
4. The functions performed, assets employed, and risks assumed by the Related Parties entering into the transaction or arrangement.
5. The business strategies employed by the Related Parties entering into the transaction or arrangement.

6. The Authority’s examination as to whether income and expenditures resulting from the Taxable Person’s relevant transactions or arrangements meet the arm’s length standard shall be based on the transfer pricing method used by the Taxable Person in accordance with Clause 3 or 4 of this Article, provided such transfer pricing method is appropriate having regard to the factors mentioned in Clause 5 of this Article.

7. Application of the selected transfer pricing method or combination of transfer pricing methods in accordance with Clause 3 or 4 of this Article may result in an arm’s length range of financial results or indicators acceptable for establishing the arm’s length result of a transaction or arrangement between Related Parties, subject to any conditions specified in a decision issued by the Authority.

8. Where the result of the transaction or arrangement between Related Parties does not fall within the arm’s length range, the Authority shall adjust the Taxable Income to achieve the arm’s length result that best reflects the facts and circumstances of the transaction or arrangement.

9. Where the Authority makes an adjustment to the Taxable Income pursuant to Clause 8 of this Article, the Authority shall rely on information that can or will be made available to the Taxable Person.

10. Where the Authority or a Taxable Person adjusts the Taxable Income for a transaction or arrangement to meet the arm’s length standard, the Authority shall make a corresponding adjustment to the Taxable Income of the Related Party that is party to the relevant transaction or arrangement.

11. Where a foreign competent authority makes an adjustment to a transaction or arrangement involving a Taxable Person to meet the arm’s length standard, such Taxable Person can make an application to the Authority to make a corresponding adjustment to its Taxable Income.