Plain meaning
The transfer-pricing principle that related parties should price transactions as independent parties would under comparable circumstances.
Also called
arms length principle
arm's length
arm's-length
Key points
- Related-party prices are tested against what independent parties would have agreed to in comparable circumstances.
- Methods can examine comparable prices, resale margins, cost-plus markups, transactional net margins, or profit splits.
- Documentation matters because taxpayers may need to support the pricing approach used.
- Adjustments can affect income, withholding tax, penalties, and double-taxation relief.
Why it comes up
The arm's length principle is central to transfer pricing, cross-border audits, and multinational tax disputes.