Reassessing the Arm’s Length Principle in Transfer Pricing Regulation: A Doctrinal and Practical Analysis from a Zambian Perspective

Abstract

The arm’s length principle (ALP) has long been considered the cornerstone of international transfer pricing regimes. Originating from Article 9 of the OECD Model Tax Convention, the ALP aims to ensure that transactions between related entities reflect market conditions as if undertaken by independent enterprises. This article critically examines the doctrinal, institutional, and practical dimensions of the ALP, particularly within the context of developing economies such as Zambia. While the ALP underpins Zambia’s transfer pricing regulatory framework, significant concerns remain regarding its conceptual robustness, administrative enforceability, and susceptibility to manipulation by multinational enterprises (MNEs). The study evaluates the OECD's comparability analysis, the best-method rule, and the documentation requirements that form the procedural backbone of the ALP. It also explores prominent criticisms—including the principle's reliance on comparable transactions, its administrative burden, and its inadequacy in addressing complex intra-group transactions involving intangible assets or work-in-process inventories. Drawing on legal, economic, and policy perspectives, this paper contributes to the scholarly debate on whether the ALP remains a viable mechanism for equitable taxation in global commerce or whether alternative paradigms are necessary.