What the arm's length principle means, in plain words
A dated, sourced explainer.
Reviewed by Ajit Jain on
Per the cited source, the arm's length principle "is the condition or the fact that the parties of a transaction are independent and on an equal footing." For related-party transactions between associated enterprises, this is the condition of independence and equal footing their dealings are measured against, as the source defines it.
What the arm's length principle means
According to the source, the arm's length principle "is the condition or the fact that the parties of a transaction are independent and on an equal footing" (https://en.wikipedia.org/wiki/Arm%27s_length_principle).
Who is affected
This condition applies to related-party transactions between associated enterprises -- that is, enterprises that are not, by default, independent of one another in the way the source's definition describes.
Why it matters
The source's definition supplies the benchmark: it describes the arm's length principle as the condition or fact of the transacting parties being "independent and on an equal footing." For associated enterprises -- which are related, not independent, by definition -- that is the standard their transactions are referenced against.
Source
https://en.wikipedia.org/wiki/Arm%27s_length_principle: "is the condition or the fact that the parties of a transaction are independent and on an equal footing"
Sources
- https://en.wikipedia.org/wiki/Arm%27s_length_principle: "is the condition or the fact that the parties of a transaction are independent and on an equal footing"
Author: Ajit Jain