Arm's length principle
The arm's length principle requires that transactions between related parties, such as divisions within a multinational, be priced as if conducted between independent parties, preventing artificial profit shifting to lower-tax.
FrameworkTransfer pricing
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Without a pricing rule, a group could set an internal transfer price purely to shift profit into a low-tax division, making divisional profit meaningless. The arm's length principle forces that price to match what independent parties would negotiate, using methods such as comparable uncontrolled price or cost-plus; tax authorities can adjust and penalise deviations.
Where it fits
SubjectManagerial AccountingAdvancedTopicTransfer PricingAdvanced