The arm's length principle (ALP) is the condition or the fact that the parties to a transaction are independent and on an equal footing.The principle is often invoked to avoid undue government influence over other bodies, such as the
legal system, the press, or the arts. For example, in the United Kingdom
Arts Councils operate "at arms length" in allocating the funds they receive from the
government [1]. The Organisation for Economic Co-operation and Development (OECD) has adopted the principle in Article 9 of the OECD Model Tax Convention, to ensure that transfer prices between companies of
multinational enterprises are established on a
market value basis. In this context, the principle means that prices should be the same as they would have been, had the parties to the transaction not been related to each other. This is often seen as being aimed at preventing profits being systematically deviated to lowest
tax countries, although most countries are also concerned about prices that fail to meet the arm's length test due to inattention rather than by design and that shifts
profits to any other
country (whether it has low or high tax rates). It provides the legal framework for
governments to have their fair share of
taxes, and for
enterprises to avoid
double taxation on their
profits.
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arm's length arm's length, the length of the arm...
see also arm
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