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The Arm's Length Principle for Fair Transfer Pricing
Anneke Zwart, Student (University), Netherlands
For transfer pricing to be fair, a so-called Arm’s Length Principle needs to be applied. This principle states that the price charged by one party to another should not be influenced by the relationship between the parties; parties must behave as if they are independent from each other.
For multinational companies this means that the price charged for transferred goods must not be higher than the price of the product sold domestically. In this way the transfer prices reflect the prices on the open market.
Source: Korn, E., & Lengsfeld, S. (2007). Duopolistic competition, taxes, and the arm's-length principle (No. 378). Discussion papers/School of Economics and Management of the Hanover Leibniz University
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