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The arm’s length principle and its uncertain application in tax transfer pricing

In his book, Andrea Musselli observes how ALP is applied worldwide and how it should be applied in spite of the country or the economic sector

2' di lettura

The arm's length principle (ALP) is widely enforced but it is often applied in different ways.

There are several reasons for that but what one should first understand is the basic problem. A paradoxical target has been given to the principle. The ALP is used for pricing group transactions and must be based on prices of transactions in the free market. However group transactions just and usually occur when independent firms do not want to negotiate in reason of risks that they should assume in doing that. For independent parties a solution is to agree a contract which rules their duties and rights in all the state (conditions) of the world (complete contract), even in the presence of future and uncertain events. When such independent contracts are not easily avaliable in the free market, one must suppose an economic game between parties which are truly in conflict of interest but that can find a reasonable solution since when they do not cooperate their payoff is lower than when they cooperate.


Starting from mentioned arguments the book Tax Transfer Pricing under the arm's length and the sale country principles by Andrea Musselli, Publisher IlSole24Ore professional (in English language) uses a theoretical pattern that is beneficial to cases where the ALP has been actually or can possibly be applied.

It is based on a single perspective of analysis since the ALP (but even the sale country principle) is agreed worldwide and should be applied in the same way regardless of the country or the economic sector or industry.

A country survey overlooks the most important issue of the fiscal problem, the ability to project a unitary policy in compliance with the ALP (or with the sale country principle) and that should be audited by one sole (only theoretically) existing tax authority. The practical part and examples disclose how rules should be or should have been applied, how legal proceedings can arise regarding their application, how they were decided if litigation truly occurred and finally the author's motivated opinion with special focus on which is “the breaking point” of a specific analysis. The term “breaking point” is used to explain which can be the factual and/or the interpretative change that is able to modify such analysis and thus the solution.

Extract from the preface of professor Reuven Avi-Yonah:«This book is a must read for any serious student of the topic and an important contribution to understanding how the ALP is applied today as well as to how it should be applied. It is an invaluable contribution and should be read widely by both tax lawyers and accountants and by tax policy makers».

Andrea Musselli received a master’s degree in Economics and Commerce (Venice Cà Foscari University, 1985) and a master’s degree in law (Milan University, 1997). He is a “dottore commercialista” (economic, corporate and tax law advisor), chartered accountant-legal auditor, tribunal advisor in Milan. For more than 30 years he has dealt with transfer pricing problems and with related international literature.

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