ARM (Arm's Length Method)

The Arm's Length Method (ALM) is a way companies ensure that transactions between related entities, like subsidiaries or parent companies, are priced as if they were between unrelated, independent businesses. This approach helps prevent tax avoidance by making sure profits are appropriately allocated across different jurisdictions. Essentially, it mirrors what unrelated parties would agree upon in a free market, ensuring transparency and fairness in transfer pricing. For example, if a subsidiary sells goods to its parent company, the ALM requires that the price reflects what an independent buyer and seller would negotiate, supporting accurate taxation and compliance.