Define: Arms Length Price

Arms Length Price refers to the price at which goods, services, or intellectual property are sold or transferred between two unrelated parties who are acting independently and without any special relationship or influence. It is a term commonly used in transfer pricing, which is the practice of determining the appropriate price for transactions between related entities, such as subsidiaries of the same multinational corporation.

The concept of Arms Length Price is important in international taxation to ensure that transactions between related entities are conducted on fair and market-based terms. This is because related parties may have an incentive to manipulate prices in order to shift profits to jurisdictions with lower tax rates, thereby reducing their overall tax liability.

Tax authorities around the world have established guidelines and regulations to determine whether the price of a transaction between related parties is at arms length. These guidelines typically require a comparison of the transaction in question with similar transactions between unrelated parties, taking into account factors such as the nature of the goods or services, the market conditions, and the economic circumstances of the parties involved.

If a transaction is found to be not at arms length, tax authorities may make adjustments to the reported income or expenses of the related parties involved, in order to reflect a fair and market-based price. Failure to comply with arms length pricing rules can result in penalties, interest, and potential legal disputes between taxpayers and tax authorities.

In summary, Arms Length Price is a key concept in transfer pricing and international taxation, aimed at ensuring that transactions between related parties are conducted on fair and market-based terms. Compliance with arms length pricing rules is crucial for multinational corporations to avoid tax-related issues and maintain good standing with tax authorities.

This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.

This glossary post was last updated: 29th March 2024.