Tax
Arm's length principle
The arm's length principle requires that transactions between related companies be priced as they would be between independent parties. It is the international standard used by tax authorities to test transfer pricing and to prevent profit being shifted artificially between jurisdictions.
In plain terms: Charge your own companies what a stranger would have charged.
Why it matters
The test behind every transfer pricing question. Practically, it means keeping evidence of comparable market rates for whatever the entities exchange — development work, licensing, management services.
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