Please Mind the Gap: Arm’s Length Prices and Fair Market Value

Arm’s length comparison is the guiding principle for transfer pricing purposes. In cases of valuations that are performed based on other standards, such as the fair market value, it is questionable to what extent such values can be considered to have an arm’s length nature in intercompany sales or licenses of intangibles. This chapter compares the arm’s length principle with fair market value. It demonstrates that they follow quite different principles. The fair market value has a rather objective perspective, whereas the arm’s length principle takes subjective aspects into consideration that results in a two-sided approach. As such, there is a gap between both standards, which might lead to different results. The magnitude of this gap depends on the specific facts and circumstances. Acceptance of a valuation that is based on fair market value (or other standards) depends on the underlying assumptions. This chapter outlines possible amendments to existing valuations that would lead to a better fit with the arm’s length standard and could even close the gap.