Rule 78: Other arm’s-length-price method
Rule 78 describes the other method referred to in section 165(1)(f). It uses the actual or hypothetical price for the same or a similar uncontrolled transaction between non-associated enterprises in comparable circumstances.
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Bare law
Rule 78 - Other method for determination of arm's length price
For the purposes of section 165(1)(f), the other method for determination of the arm's length price in relation to an international transaction or a specified domestic transaction shall be any method which takes into account the price, which — (a) has been charged or paid; or (b) would have been charged or paid, for the same or similar uncontrolled transaction, with or between non-associated enterprises, under similar circumstances, considering all the relevant facts.
Rule breakdown
Understand what the other method must measure
The method must take account of the price charged or paid, or that would have been charged or paid, for the same or a similar uncontrolled transaction.
It is not an unrestricted permission to select any convenient price or valuation result.
Use non-associated transactions and similar circumstances
The reference transaction must be with or between non-associated enterprises and under similar circumstances, considering all relevant facts.
Identify the property or service, terms, timing, market conditions and parties underlying the comparison.
Support a hypothetical price with evidence
The wording allows a price that would have been charged or paid, not only a completed historical sale. The evidence still needs to support the required same-or-similar uncontrolled transaction and circumstances.
Record the source, assumptions and reliability of any hypothetical-price evidence; an unsupported internal estimate does not become arm’s length merely because it is labelled hypothetical.
Select the method under the wider framework
Read Rule 78 with the most-appropriate-method and comparability rules. Explain why this method is best suited and reliable for the actual international or specified domestic transaction.
Keep the alternatives considered, adjustments and final computation in the transfer-pricing file.
Key takeaways
Actual or hypothetical price
Both are contemplated by the rule.
Comparable uncontrolled context
Same or similar transaction, non-associated parties and similar circumstances matter.
Reliability must be shown
Document why the method and evidence fit the actual case.
Practical checklist
- Identify the uncontrolled transaction and supporting price evidence.
- Document relevant facts and assumptions.
- Explain the method’s suitability and reliability.
Avoid
- Do not use the label other method to bypass comparability.
- Do not treat an unsupported internal estimate as sufficient evidence.
FAQs
Must the reference transaction already have occurred?
The rule also contemplates the price that would have been charged or paid, subject to its conditions.
Does any valuation automatically satisfy the other method?
No. It must meet the price, transaction, party and circumstances requirements and the wider method-selection framework.
Does the rule cover specified domestic transactions?
Yes. Its opening words expressly include them.
Glossary
- Other method
- The price-based method described by Rule 78 for section 165(1)(f).
- Hypothetical price
- A price that would have been charged or paid within the conditions of the rule.