Arms length principle

The arms length principle (ALP) is the condition orthe fact that the parties to a transaction are independentand on an equal footing. Such a transaction is known asan arms-length transaction. It is used specically incontract law to arrange an equitable agreement that willstand up to legal scrutiny, even though the parties mayhave shared interests (e.g., employer-employee) or are tooclosely related to be seen as completely independent (e.g.,the parties have familial ties).

1 Examples

A simple example of not at arms length is the sale ofreal property from parents to children. The parents mightwish to sell the property to their children at a price be-low market value, but such a transaction might later beclassied by a court as a gift rather than a bona de sale,which could have tax and other legal consequences. Toavoid such a classication, the parties need to show thatthe transaction was conducted no dierently from howit would have been for an arbitrary third party. Thiscould be done, for example, by hiring a disinterested thirdparty, such as an appraiser or broker, who could oer aprofessional opinion that the sale price is appropriate andreects the true value of the property.The principle is often invoked to avoid undue governmentinuence over other bodies, such as the legal system, thepress, or the arts. For example, in the United KingdomArts Councils operate at arms length in allocating thefunds they receive from the government.The Organisation for Economic Co-operation and De-velopment (OECD) has adopted the principle in Article9 of the OECD Model Tax Convention, to ensure thattransfer prices between companies of multinational enter-prises are established on a market value basis. In this con-text, the principle means that prices should be the same asthey would have been, had the parties to the transactionnot been related to each other. This is often seen as beingaimed at preventing prots being systematically deviatedto lowest tax countries, although most countries are alsoconcerned about prices that fail to meet the arms lengthtest due to inattention rather than by design and that shiftsprots to any other country (whether it has low or high taxrates). It provides the legal framework for governments tohave their fair share of taxes, and for enterprises to avoiddouble taxation on their prots.In the workplace, supervisors and managers deal with

employee discipline and termination of employment atarms length through the human resources department, ifthe company has one. In such cases, terminations and dis-cipline must be rendered by sta who have the trainingand certication to do so legally. This is intended to pro-tect the employer from legal recourse that employees mayotherwise have in the event that it can be demonstratedthat such discipline or terminations were not handled inaccordance with the latest labor laws. For employeesin unionised environments, shop stewards can representthe employee, whereas the HR department represents thecompany, so that both sides are on a more equal footingand can resolve matters outside of court, using informalnegotiations or a grievance, saving both sides time andmoney. The arms length dealings in this case mean thatboth an employee and a supervisor each have a qualiedadvocate.

2 See also English contract law Say on pay

3 External links Transfer pricing: Keeping it at arms length

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