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Arm's length principle
From Wikipedia, the free encyclopedia
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
law to 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 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 than it would have been for
an arbitrary third party. This erested 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 arm's length" in allocating the
funds they receive from the government.
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). It provides the legal framework for governments
to have their fair share of taxes, and for enterprises to avoid double taxation on their profits.
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 in the event that it can be demonstrated that such
discipline or terminations were not handled in accordance with the latest labor 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.
See also
English contract law
Say on pay
6/24/2014 Arm' s length principle - Wikipedia, the free encyclopedia' s_length_principle 2/2
External links
Transfer pricing: Keeping it at arms length
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Categories: Contract law
This page was last modified on 14 June 2014 at 08:15.
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