Arms length principle is the fact or condition that the parties involved in a transaction are on equal footing and independent. Different countries have different tax rates and multinational company increase its profits to low tax countries compared to high tax countries. Apple always has international transaction and a local head quarter invoicing services and management fees. A parent company provides finance to subsidiary and operational company. A manufacturing enterprise supplies the complete finished product to a distributing part of this parent company. In case of acquisition apple are able to managing the terms and condition of these controlled transaction. A multinational enterprises has a power to control the terms and condition of transaction with another company. In a way this parent company can set the price and able to influence the due tax amount and table profit. In order to prevent this tax administration has establish the arm’s length principle. According to this principle, controlled transaction is done at normal market rates and every organisation has to follow this principle. However, there is some criticism in the Arm’s Length Principle and the main complaint is that it leaves too much scope for interpretation that results a huge discussion between tax administrators and taxpayers. Every brand has not same value and every product is not the same therefore discussion focuses on if the transaction are enough comparable or all condition and terms needs to be same.( Challoumis et al. 2020)
CPM method: The comparable profits method refers a transfer pricing method that based on a principle that suggests the same taxpayer’s needs to earn same return over time. In order to determine the transfer prices CPM methods are used. It is one of the best methods for determining arm’s length principle. US regulation and OECD guidelines have introduced this method rule and five freedoms to revenue authorities as well as to a taxpayer. The various terms that are used in this, method is ‘Earliest start date’, ‘Latest start date’, float and crash duration. In order to apply CPM method a taxpayer needs to first identify the traded companies that operates in a same industry. In order to test the transaction of another subsidiary company the financial data of comparable companies are used. As an example if a company has headquarter in United States this parent company has a responsibility of financing and establishing business strategies. Parent company also has a responsibility to own and develop the intellectual property such as trade names, trademarks, design and so on. This parent company wishes to enhance it business globally and establishing another subsidiary company. In this report, the parent company is apple that ha s a headquarters in United States and that wishes to expand its footprint globally is establishing a subsidiary in Germany. This subsidiary company has a responsibility to develop the Germany market by using the brand of parent company and selling their items to Germany consumers.
Tested party: Tested party refers an entity whose margin of profit is compared with the comparable. This tested party is a useful entity in order to measure arm’s length principle. It is an important factor to identify such entity that is known or point of reference. This entity is used to determine which enterprise is eligible for a trustworthy transaction. The tested party needs to fulfil the basic criteria of transaction so that an enterprise involves with another enterprise without any hesitation. The tested party choice needs to be consistent with functional analysis of the process of transaction. In short tested party is the one in which pricing of transfer can be applied to a smooth and reliable manner.
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