Section 161: computing income at arm's length price

The core rule

Any income arising from an international transaction or a specified domestic transaction is determined having regard to the arm's length price.

Any allowance for expense or interest arising from such a transaction is also determined having regard to the arm's length price.

Cost allocation and contribution arrangements

Where, in an international transaction or specified domestic transaction, two or more associated enterprises enter into a mutual agreement or arrangement for allocating or apportioning any cost or expense incurred (or to be incurred) in connection with a benefit, service or facility provided (or to be provided) to one or more of them, or for contributing to such cost or expense, the cost, expense or contribution allocated to, or made by, any such enterprise is also determined having regard to the arm's length price of that benefit, service or facility.

When the section does not apply

Section 161 does not apply if applying it would have the effect of reducing the income chargeable to tax, or increasing the loss, as computed on the basis of the entries in the books of account for the tax year in which the international transaction or specified domestic transaction was entered into. In other words, arm's length pricing under this Chapter cannot be used to lower an assessee's taxable income or increase a loss.

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