- Arm's length principle
The arm's length principle (ALP) is the condition or the fact that the parties to a transaction are independent and on an equal footing. Such a transaction is known as an "arm's-length transaction". It is used specifically in
contract lawto arrange an equitable 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).
A simple example is the sale of
real propertyfrom 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 fidesale, 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 than it would have been for an arbitrary third party. This can be done, for example, by hiring a disinterested third party such as an appraiser or broker, who can 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 undue government influence over other bodies, such as the
legal system, the press, or the arts. For example, in the United Kingdom Arts Councils operate "at arms length" in allocating the funds they receive from the government[ [http://www.culture.gov.uk/arts/policy_for_arts/arms_length_principle.htm Department for Culture Media and Sport - Sorry, an error has occurred ] ] .
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 valuebasis. 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 taxcountries, 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 profitsto any other country(whether it has low or high tax rates). It provides the legal framework for governmentsto have their fair share of taxes, and for enterprises to avoid double taxationon their profits.
The use of "arm's length principle" is extended as a new concept in
tortlaw. A person should keep an "arm's length" distance from another to avoid offensive or harmful contact, otherwise a battery or assaultmay result if one person goes too close to another without consent. To keep an "arm's length" from another person is respect to his/her bounds of dignity.
In the workplace,
supervisors and managers deal with employee discipline and termination of employmentat arm's length through the human resourcesdepartment, 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 recoursethat employees may otherwise have in the event that it can be demonstrated that such discipline or terminations were not handled in accordance with the latest labour laws. For employees in unionised 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.
* [http://www.culturaleconomics.atfreeweb.com/arm's.htm THE ARM'S LENGTH PRINCIPLE AND THE ARTS: AN INTERNATIONAL PERSPECTIVE — PAST, PRESENT AND FUTURE]
* [http://www.oecdobserver.org/news/fullstory.php/aid/670/Transfer_pricing:_Keeping_it_at_arms_length.html Transfer pricing: Keeping it at arm’s length]
* [http://www.ustransferpricing.com/arms_length_principle.html Definition of the Arm's Length Principle under U.S. law from U.S. transfer pricing portal site]
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