Review:
Arm's Length Principle
overall review score: 4.2
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score is between 0 and 5
The arm's-length principle is a fundamental concept in transfer pricing and international taxation, which states that transactions between related entities (such as subsidiaries of a multinational corporation) should be conducted as if they were between independent parties. This ensures that taxable income is accurately allocated and that tax authorities can assess the appropriate level of taxation in different jurisdictions.
Key Features
- Ensures fair transfer pricing by mimicking market conditions
- Helps prevent profit shifting and tax evasion
- Widely used by tax authorities and international organizations like the OECD
- Applicable to various types of transactions including goods, services, and intangibles
- Supports compliance with international tax regulations
Pros
- Promotes fair and transparent taxation across borders
- Helps prevent tax base erosion and profit shifting
- Supported by major international bodies such as the OECD
- Provides clear guidelines for multinational corporations
Cons
- Can be complex and costly to implement and audit
- Subject to differing interpretations across jurisdictions
- May create compliance challenges for small and medium-sized enterprises
- Not always perfectly applicable to all types of transactions or industries