Jelena Mihic
Managing Director at Kreston MDM Serbia
Safe Harbors: Redefining the arm’s length principle
November 6, 2025
The arm’s length principle (ALP) has long been the cornerstone of transfer pricing, requiring related companies to price transactions as if they were independent. However, as modern businesses become increasingly digital, data-driven, and reliant on intangibles, ALP is proving more challenging to apply and enforce. In response, many countries are embracing safe harbors, which are simplified and standardised methods for pricing routine transactions, potentially reshaping global tax administration.
Read the full article by Jelena Mihic, Managing Director at Kreston MDM, for Bloomberg Tax here, or read a summary below.
Why Safe Harbors are rising
Finding reliable comparables, the heart of ALP, has become increasingly complex, especially for intragroup services, loans, and intangible assets. Traditional benchmarking often leads to costly studies and disputes. Safe harbors address this by allowing fixed profit margins or interest rates for low-risk, common transactions. This reduces documentation, lowers costs, and provides clearer, faster outcomes.
Global momentum
In recent years, jurisdictions like the UAE and Switzerland have formalised safe harbor rules to streamline compliance.
- The UAE’s Transfer Pricing Guide allows a cost-plus 5% markup for routine intragroup services.
- Switzerland publishes annual safe harbor interest rates for intercompany loans, removing the need for case-by-case benchmarking.
At the international level, the OECD’s Amount B, effective from 2025, sets standardised returns on sales for baseline marketing and distribution functions. It aims to reduce disputes and compliance burdens, particularly for developing countries. Together, these measures mark a global shift toward clearer, rules-based pricing frameworks.
Expanding Scope
Once limited to financial transactions, safe harbors now cover a wide range of low-value services like IT, HR, and payroll. Routine distribution functions are also being standardised, with Amount B serving as a global template. Even under Pillar Two, safe harbors simplify minimum-tax calculations.
The message is clear: simplification is no longer the exception but part of the core design of modern transfer pricing.
Why ALP isn’t always enough
ALP assumes each group entity acts independently, yet multinational groups increasingly share IP, data, and decision-making. True comparables are scarce, resulting in inconsistent outcomes and potentialdouble taxation.
While safe harbors can’t address complex, high-value cases, they do streamline routine ones—offering clear results, fewer disputes, and predictable administration.
Implications for stakeholders
For multinationals, safe harbors simplify compliance for routine loans and services but require strategic decisions about when to apply them, especially across jurisdictions with differing rules.
When it comes to advisers, the focus is shifting from exhaustive benchmarking to designing frameworks and risk assessments that help clients choose between safe harbors, ALP, or hybrid models.
For tax authorities, safe harbors enhance efficiency and consistency but require careful calibration to prevent either revenue loss or over-taxation. Coordination between jurisdictions remains crucial to avoid mismatches.
A blended future
We’re not abandoning the arm’s length principle, but adapting it. ALP will remain central for complex, unique transactions, while safe harbors and hybrid methods handle routine, low-risk cases where detailed benchmarking adds little value.
The goal is proportionality: use ALP where it matters and streamlined tools where it doesn’t. This blended approach delivers clearer outcomes, less controversy, and better use of administrative resources.
Guiding principles for modern Transfer Pricing
Safe harbors reflect how value is created in today’s global economy through shared platforms, mobility, and integration. To work effectively, they need clear eligibility criteria, regularly updated margins, and coordination between countries.
Done right, they provide a faster, fairer, and more predictable framework, allowing both taxpayers and tax authorities to focus on the cases that truly matter.
For more information on how Kreston Global can help you with Transfer Pricing, click here.
