The Arm’s Length Principle: A Panacea or Problem to Regulating Transfer Pricing Transactions by MNEs in Developing Countries

Favourate Y. Mpofu () and Eukeria Wealth ()
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Favourate Y. Mpofu: University of Johannesburg, South Africa
Eukeria Wealth: University of Namibia, South Africa

Eurasian Journal of Business and Management, 2022, vol. 10, issue 2, 137-152

Abstract: Transfer pricing manipulation by multinational enterprises is a big problem in developing countries, considering the increased levels of tax avoidance and evasion in these countries. The revenue lost through evasion and avoidance schemes as well as through aggressive tax planning robs developing countries of the much-needed domestic revenues to fund public expenditure. The repercussions of revenue inadequacies are evident in developing countries’ governments to adequately invest in education, tax administration, health and security, infrastructural development, and economic development. Most developing countries having enacted transfer pricing regulation, with the arm’s length principle are at the core of these regulations. This principle has been criticized in literature for its inefficiency and ineffectiveness in regulating transfer pricing in evolving economic times, while some researchers continue to maintain its relevance. In view of the conflicting views on the cogency of the arm’s length principle in developing countries, this paper sought to unpack this debate through an evaluative review to show the areas of disagreement and agreement among scholars. The review was motivated by the continued concern and discussions of tax evasion and avoidance by multinational enterprises through aggressive transfer pricing in developing countries. Through a critical literature review, this article assesses the applicability and relevance of the principle in developing countries. Findings reveal controversies in the availability of comparable data, continued abuse of transfer pricing as well as the difficulty in applying the principle in digital transactions and intangibles.

Keywords: Arm’s Length Principle; Transfer Pricing; MNEs; Legislation; Tax Avoidance; Taxation (search for similar items in EconPapers)
Date: 2022
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