Navigating the Arm's Length Principle: Bridging the Gap Between Transfer Pricing and Customs Valuation in the East African Community

Abstract

The role of the arm’s length principle is significant in both transfer pricing and customs valuation for revenue collection between related multinational corporations (MNCs) within the East African Community (EAC). Taxing related MNCs is challenging when the same transaction is taxed under both transfer pricing and customs valuation frameworks using the arm’s length principle. MNCs are subject to double taxation or unfair tax risks, while revenue authorities face the risk of revenue loss by handling the same transaction under different legal frameworks, despite having the same objectives. Although full harmonization is generally considered unattainable, certain areas of law can be harmonized to promote the consistent application of the arm’s length principle in both contexts. This article seeks to reveal the legal challenges faced by income tax and customs departments in applying the arm’s length principle. Using doctrinal and comparative methods, the study found discrepancies between domestic income tax and customs laws within the region, and that EAC laws do not fully adopt international standards for harmonizing these two sets of laws. It recommends amendments to income tax and customs laws to enhance coherence.