"Arm's length" redirects here. For the physical measurement of arms, see Arm span.
The arm's length principle (ALP) is the condition or the fact that the parties of a transaction are independent and on an equal footing.[1] Such a transaction is known as an "arm's-length transaction".
It is used specifically in contract law to arrange an agreement that will stand up to legal scrutiny, even though the parties may have shared interests (e.g., employer-employee) or are too closely related to be seen as completely independent (e.g., the parties have familial ties).
An arm's length relationship is distinguished from a fiduciary relationship, where the parties are not on an equal footing, but rather, power and information asymmetries exist.
A simple example of not at arm's length is the sale of real property from parents to children. The parents might wish to sell the property to their children at a price below market value, but such a transaction might later be classified by a court as a gift rather than a bona fide sale, which could have tax and other legal consequences. To avoid such a classification, the parties need to show that the transaction was conducted no differently from how it would have been for an arbitrary third party. This could be done, for example, by hiring a disinterested third party, such as an appraiser or broker, who could offer a professional opinion that the sale price is appropriate and reflects the true value of the property.
The principle is often invoked to avoid any undue government influence over other bodies, such as the legal system, the press, or the arts. For example, in the United Kingdom Arts Councils[which?] operate "at arm's length" in allocating the funds they receive from the government.[3]
In the workplace, supervisors and managers deal with employee discipline and termination of employment at arm's length through the human resources department, if the company has one. In such cases, terminations and discipline must be rendered by staff who have the training and certification to do so legally. This is intended to protect the employer from legal recourse that employees may otherwise have if it can be demonstrated that such discipline or terminations were not handled in accordance with the latest labor laws. For employees in unionized environments, shop stewards can represent the employee, whereas the HR department represents the company, so that both sides are on a more equal footing and can resolve matters outside of court, using informal negotiations or a grievance, saving both sides time and money. The arm's length dealings in this case, mean that both an employee and a supervisor each have a qualified advocate.
International tax lawEdit
The Organisation for Economic Co-operation and Development (OECD) has adopted the principle in Article 9 of the OECD Model Tax Convention, to ensure that transfer prices between companies of multinational enterprises are established on a market value basis. In this context, the principle means that prices should be the same as they would have been, had the parties to the transaction not been related to each other. This is often seen as being aimed at preventing profits being systematically deviated to lowest tax countries, although most countries are also concerned about prices that fail to meet the arm's length test due to inattention rather than by design and that shifts profits to any other country (whether it has low or high tax rates).
The OECD Model Tax Convention provides the legal framework for governments to have their fair share of taxes, and for enterprises to avoid double taxation on their profits. The arm's length standard is instrumental to determine how much of the profits should be attributed to one entity and, consequently, the extent of a country's tax claim on such entity. The OECD has developed thorough guidelines on how the arm's length principle should be applied in this context.[4] Under this approach, a price is considered appropriate if it is within a range of prices that would be charged by independent parties dealing at arm's length. This is generally defined as a price that an independent buyer would pay an independent seller for an identical item under identical terms and conditions, where neither is under any compulsion to act.
Transfer pricing became a highly controversial topic[5] in the last years, which contributed to the development of the Base Erosion and Profit Shifting (BEPS) project by the OECD and with the endorsement of the G20.[2]
The World Customs Organization (WCO) and World Trade Organization (WTO) have also adopted, in effect, the arm's length principle in Customs valuations. The Agreement on Implementation of Article VII (known as the WTO Agreement on Customs Valuation or the “Valuation Agreement”) ensures that determinations of the customs value for the application of duty rates to imported goods are conducted in a neutral and uniform manner, precluding the use of arbitrary or fictitious customs values.[6][7]
^Quinn, R.B.M. (1997). "Distance or intimacy? The arm's length principle, the British government and the arts council of Great Britain". International Journal of Cultural Policy. 4 (1): 127–159. doi:10.1080/10286639709358066.
OECD: Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (2010)
Article 7 of the General Agreement on Tariffs and Trade (GATT)
WCO: Brief Guide to the Customs Valuation Agreement
WTO: Technical information on Customs Valuation
WCO: Guide to Customs Valuation and Transfer Pricing
September 26, 2023
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Arm s length redirects here For the physical measurement of arms see Arm span This article needs additional citations for verification Please help improve this article by adding citations to reliable sources Unsourced material may be challenged and removed Find sources Arm s length principle news newspapers books scholar JSTOR March 2016 Learn how and when to remove this template message The arm s length principle ALP is the condition or the fact that the parties of a transaction are independent and on an equal footing 1 Such a transaction is known as an arm s length transaction It is used specifically in contract law to arrange an agreement that will stand up to legal scrutiny even though the parties may have shared interests e g employer employee or are too closely related to be seen as completely independent e g the parties have familial ties An arm s length relationship is distinguished from a fiduciary relationship where the parties are not on an equal footing but rather power and information asymmetries exist It is also one of the key elements in international taxation as it allows an adequate allocation of profit taxation rights among countries that conclude double tax conventions through transfer pricing among each other Transfer pricing and the arm s length principle were one of the focal points of the base erosion and profit shifting BEPS model developed by the OECD and endorsed by the G20 2 Contents 1 Examples in contract law 2 International tax law 3 See also 4 References 5 External linksExamples in contract law EditThis section needs additional citations for verification Please help improve this article by adding citations to reliable sources in this section Unsourced material may be challenged and removed April 2016 Learn how and when to remove this template message A simple example of not at arm s length is the sale of real property from parents to children The parents might wish to sell the property to their children at a price below market value but such a transaction might later be classified by a court as a gift rather than a bona fide sale which could have tax and other legal consequences To avoid such a classification the parties need to show that the transaction was conducted no differently from how it would have been for an arbitrary third party This could be done for example by hiring a disinterested third party such as an appraiser or broker who could offer a professional opinion that the sale price is appropriate and reflects the true value of the property The principle is often invoked to avoid any undue government influence over other bodies such as the legal system the press or the arts For example in the United Kingdom Arts Councils which operate at arm s length in allocating the funds they receive from the government 3 In the workplace supervisors and managers deal with employee discipline and termination of employment at arm s length through the human resources department if the company has one In such cases terminations and discipline must be rendered by staff who have the training and certification to do so legally This is intended to protect the employer from legal recourse that employees may otherwise have if it can be demonstrated that such discipline or terminations were not handled in accordance with the latest labor laws For employees in unionized environments shop stewards can represent the employee whereas the HR department represents the company so that both sides are on a more equal footing and can resolve matters outside of court using informal negotiations or a grievance saving both sides time and money The arm s length dealings in this case mean that both an employee and a supervisor each have a qualified advocate International tax law EditThe Organisation for Economic Co operation and Development OECD has adopted the principle in Article 9 of the OECD Model Tax Convention to ensure that transfer prices between companies of multinational enterprises are established on a market value basis In this context the principle means that prices should be the same as they would have been had the parties to the transaction not been related to each other This is often seen as being aimed at preventing profits being systematically deviated to lowest tax countries although most countries are also concerned about prices that fail to meet the arm s length test due to inattention rather than by design and that shifts profits to any other country whether it has low or high tax rates The OECD Model Tax Convention provides the legal framework for governments to have their fair share of taxes and for enterprises to avoid double taxation on their profits The arm s length standard is instrumental to determine how much of the profits should be attributed to one entity and consequently the extent of a country s tax claim on such entity The OECD has developed thorough guidelines on how the arm s length principle should be applied in this context 4 Under this approach a price is considered appropriate if it is within a range of prices that would be charged by independent parties dealing at arm s length This is generally defined as a price that an independent buyer would pay an independent seller for an identical item under identical terms and conditions where neither is under any compulsion to act Transfer pricing became a highly controversial topic 5 in the last years which contributed to the development of the Base Erosion and Profit Shifting BEPS project by the OECD and with the endorsement of the G20 2 The World Customs Organization WCO and World Trade Organization WTO have also adopted in effect the arm s length principle in Customs valuations The Agreement on Implementation of Article VII known as the WTO Agreement on Customs Valuation or the Valuation Agreement ensures that determinations of the customs value for the application of duty rates to imported goods are conducted in a neutral and uniform manner precluding the use of arbitrary or fictitious customs values 6 7 See also EditEnglish contract law Say on pay Transfer pricing Customs valuationReferences Edit Arintass 2021 10 22 Arm s Length Principle in Transfer Pricing Arintass en Retrieved 2023 07 26 a b OECD BEPS Project Quinn R B M 1997 Distance or intimacy The arm s length principle the British government and the arts council of Great Britain International Journal of Cultural Policy 4 1 127 159 doi 10 1080 10286639709358066 OECD Transfer Pricing Guidelines Tax Justice Network on Transfer Pricing 27 April 2015 United States Trade Representative Customs Valuation http www ustr gov trade agreements wto multilateral affairs wto issues customs issues customs valuation WCO Overview on the WTO Valuation Agreement External links EditTransfer pricing Keeping it at arm s length OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2010 Article 7 of the General Agreement on Tariffs and Trade GATT WCO Brief Guide to the Customs Valuation Agreement WTO Technical information on Customs Valuation WCO Guide to Customs Valuation and Transfer Pricing Retrieved from https en wikipedia org w index php title Arm 27s length principle amp oldid 1170683422, wikipedia, wiki, book, books, library,
