Tipi Tips #3: What is the arm's length principle?

The topic of this Tipi Tip is: what is the arm’s length principle?

As a small recap, transfer pricing is the setting of prices between two parties that know each other. So the next question is: what price should we set. The main rule that we use for this is actually the most important concept in transfer pricing. We want to price a transaction between two related parties as if they were not related. In other words, the price a random person would be willing to pay for this good or service in a similar situation.

That is the arm’s length principle.

However, this principle still sounds kind of vague, and does not point you straight to the correct answer. That is why to apply this principle, there are at least 5 so called transfer pricing methods that we can use. We will explain each of these separately in the upcoming Tipi Tips.