Safe Harbors: Is the Arm’s Length Principle Losing Its Grip?

The arm’s length principle has been the foundation of transfer pricing rules for decades. It says that companies in the same group should price their cross-border transactions as if they were unrelated. However, global businesses today are more interconnected, data-driven, and centered around intangible assets. In this new world, ALP is becoming harder to apply and manage.

Many countries and organizations are turning to safe harbors, which are simpler, standardized ways to price routine transactions. These rules are gaining popularity fast. And they may be reshaping how countries apply international tax laws.

Why Safe Harbors Are Gaining Ground

ALP is based on finding comparable transactions between independent parties. But in reality, that’s getting harder. Most companies don’t have exact “comparable” deals, especially when it comes to services, loans, or intangible assets like software or patents.

This leads to long benchmarking studies, subjective decisions, and costly disputes with tax authorities.

Safe harbors solve this by letting companies apply fixed profit margins or interest rates for common, low-risk transactions. That means less documentation, fewer disputes, and lower costs.

Safe Harbors Around the World

Over the past five years, several jurisdictions, including the United Arab Emirates and Switzerland, have implemented or refined safe harbor rules to streamline transfer pricing compliance and reduce audit risk. In the UAE, the Federal Tax Authority’s Transfer Pricing Guide allows a safe harbor markup of cost plus 5% for low value-added intragroup services, such as IT support or payroll, provided they are non-core and routine in nature. In Switzerland, the Swiss Federal Tax Administration published the 2025 intercompany loan interest safe harbors. These apply to financial transactions and are binding only until the next annual publication. The rates differ for loans in Swiss francs versus foreign currencies and aim to reduce the need for individual benchmarking.

At the international level, the Organisation for Economic Co-operation and Development introduced a major simplification through Amount B, finalized in 2024 and effective from January 2025, which acts as a safe harbor for baseline marketing and distribution activities. It applies a fixed return on sales for qualifying distributors based on operating margin benchmarks by region and industry. Amount B aims to reduce disputes and compliance burdens, especially for developing countries, by replacing traditional benchmarking with a standardized pricing matrix.

Collectively, these developments demonstrate a global trend toward formalized, rules-based safe harbor rules that enhance predictability for multinational enterprises.

Safe Harbors Are Expanding

Safe harbors, once largely confined to intercompany financing, are rapidly broadening in scope to cover a wider set of routine intragroup dealings.

Many regimes now provide simplified mark-ups for low-value services such as back-office support like IT, HR, and payroll, where the administrative cost of traditional benchmarking often outweighs the tax at stake.

On the commercial side, routine distribution is increasingly addressed through standardized returns, with the OECD’s Amount B offering a prominent template for baseline marketing and sales functions.

Even in the minimum-tax calculations, Pillar Two has introduced safe-harbor mechanisms that rely on streamlined data to approximate outcomes and reduce friction in early-stage compliance.

Together, these developments signal a policy shift: rather than reserving simplification for narrow corners of transfer pricing, tax authorities are deploying rules-based guardrails across common, low-risk transactions. In short, safe harbors are shifting from the sidelines to the center of global tax rules, replacing custom comparisons with clear, predictable results in routine cases.

Why Arm’s Length Doesn’t Always Work Today

The arm’s-length principle assumes that each company in a multinational group acts like a stand-alone business, comparable to an outside firm. That picture no longer fits how many companies operate. Today, groups share intellectual property, data, and technology platforms across borders. They make key decisions in one or two hubs, and teams and functions are spread across entities instead of living neatly inside one company.

When tax rules attempt to find “independent” comparables for prices in that environment, the search often falls short or relies on weak matches. Different authorities may reach different answers, which creates uncertainty, disputes, and sometimes double taxation. The result can be long benchmarking exercises, inconsistent reviews, and a higher chance of double taxation.

Safe harbors don’t answer every question, especially where unique intangibles or complex risk-sharing drive value, but they do make life easier for common, low-risk transactions. Standard margins and rates provide clear, administrable outcomes, reduce room for disagreement, and let both taxpayers and auditors focus on the limited number of cases where a full arm’s-length analysis actually adds insight.

What This Means

As safe harbors move toward the mainstream, here’s what that shift means for in-house tax teams, transfer pricing advisers, and tax authorities.

Tax managers at multinationals. For in-house tax teams, safe harbors can make day-to-day compliance noticeably easier, especially for routine loans and low-value services where traditional benchmarking is time-consuming and adds little. Standard margins or rates reduce paperwork and help avoid minor disputes. That said, audit risk doesn’t disappear. If two countries apply different safe-harbor rules, or one has none at all, prices that are “safe” in one jurisdiction may be challenged in another.

The result is a new emphasis on strategy: deciding when to elect a safe harbor, when to stick with a full arm’s-length analysis, and how to document the facts so both approaches can stand up to scrutiny.

Transfer pricing advisers. For advisers, the center of gravity shifts from long lists of comparables toward judgment and policy design. Clients will seek help in choosing among safe harbors, full ALP, and hybrids, and understanding how these choices impact their footprint. Demand is growing for clear frameworks, such as eligibility tests, decision trees, and risk assessments rather than just reports. Advisers also need to stay current on both domestic rules and OECD guidance, since small changes in criteria or rates can alter the best answer for a client’s transactions from one year to the next.

Governments and tax authorities. For administrations, safe harbors promise efficiency: fewer low-value audits, more consistent outcomes, and better certainty for taxpayers. But that simplicity comes with calibration risk. If margins or interest rates are set too low, revenues can erode, if they are too high, disputes simply move to a different battleground. Coordination matters. Without alignment, bilateral or multilateral, mismatches can increase double taxation and mutual agreement cases, undermining the very predictability safe harbors are meant to deliver.

Therefore, in a period of economic and political uncertainty, safe harbors offer a practical, stable way to resolve routine pricing questions. Used thoughtfully, alongside ALP and, where appropriate, hybrid methods, they can lower costs, reduce controversy, and let both taxpayers and authorities focus on the small subset of cases that truly require detailed analysis.

Are We Leaving the Arm’s Length Era?

We’re not leaving the arm’s-length era, but we are moving to a more practical mix of tools.

ALP will continue to set the baseline for many transactions, especially when the facts are unique and value drivers are difficult to determine. At the same time, tax systems are leaning on safe harbors for routine, low-risk dealings where the cost of full benchmarking outweighs the benefit. In between, hybrid methods, such as simplified profit splits or formula-based returns are emerging for sectors built on shared platforms, data, and IP.

The goal isn’t to replace ALP; it’s to use it where it adds insight and to use simpler, more predictable rules where it doesn’t. That way, taxpayers get clearer outcomes, authorities spend less time on low-value disputes, and attention shifts to the smaller set of cases that truly need detailed analysis.

Takeaways

The rise of safe harbors shows that tax systems are adapting to how businesses actually create value today. In an economy built on shared platforms, mobile intangibles, and cross-border decision-making, plus the overlay of global minimum taxes, the old ideal of finding a perfect third-party comparable for every intragroup deal is no longer practical or proportionate.

Safe harbors point to a faster, fairer, and more predictable way to resolve routine cases, but only if they’re well designed. That means clear eligibility tests (what counts as “low-value” or “baseline” functions), calibrated rates and margins that are updated regularly, and documentation that is short, standardized, and focused on facts. It also means hard guardrails to prevent gaming: materiality thresholds, exclusions for high-risk or unique intangibles, and fallback rules when transactions fall outside the safe-harbor scope.

Coordination is the make-or-break factor. To avoid double taxation or under-taxation, jurisdictions should align on core parameters, publish bilateral acceptance where possible, and tie safe harbors into existing relief tools such as advance pricing agreements, mutual agreement procedures, and competent-authority frameworks. For developing countries, model templates, capacity-building initiatives, and shared data resources can help reduce compliance costs without compromising revenue.

Implementation should be iterative. Tax authorities can pilot safe harbors, measure outcomes (such as audit time saved, dispute rates reduced, and revenue stability), and adjust them annually. Multinationals can adopt decision trees to choose between a safe harbor, full ALP, or hybrids. Also, MNEs should maintain concise evidence files and monitor Pillar Two interactions so elections in one regime don’t create mismatches in another. Is the arm’s length principle being abandoned? No, but how and when it applies will be reconsidered. While the full ALP is reserved for complex, high-stakes cases, safe harbors can be deployed for routine fact patterns and use simplified formulas where integrated, intangible-driven models make comparables unworkable.

Done well, this blended approach delivers proportionality and certainty for taxpayers while protecting revenue and refocusing enforcement on the issues that matter most. In other words, the focus is being shifted to what matters most.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Jelena Mihić Munjić is Managing Director at Kreston MDM Serbia–Kreston Global.

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