Abstract
M.Comm.
The purpose of this study is to determine the meaning of 'arm's length transactions' as stated in the Income Tax Act, Act 58 of 1962. Although the meaning of arm's length transactions have been properly interpreted by our courts, no guidelines or policy documents pertaining to this concept, have been issued by the South African Revenue Services in as far as it relates to transfer pricing.
Several of the developed countries have adopted the guidelines of the Organisation of Economic Co-ordination and Development regarding transfer prices and the arm's length principle in respect of international transactions.
The substance of arm's length transactions : The concept of arm's length is not easy to state: it is not unlike the proverbial elephant which could easily be recognised, but could not be defined. It can be defined by reference to the terms of the transaction in question, or by reference to the relationship between the parties to it, or by reference to both of these factors.
Normally, parties enter into an arm's length transaction when each party:
• Is independent of the other; and
• Strives to get the utmost possible advantage from the transaction for himself.
The effects of an arm's length transaction are:
• The rights and obligations created by the transaction are more likely to be regarded as normal than abnormal; and
• The means and manner employed in entering into the transaction are more likely to be normal than abnormal.
It is clear that the meaning of arm's length is defined, but that the effect of such transactions will depend on the facts of each case. What may be normal in one case can be abnormal in another depending on the underlying facts.
Although South African transfer pricing legislation includes the arm's length principle in respect of international transactions, legislation on transfer pricing should be more clear as to what is normal or abnormal in respect of international transactions.