arm's length principle

The arm's length principle is a guideline used in business and taxation to ensure that transactions between related parties (like companies owned by the same parent company) are conducted as if they were unrelated. This means that the prices and terms set in these transactions should reflect what they would be in a typical market situation, ensuring fairness and preventing manipulation. Essentially, it aims to avoid conflicts of interest and ensure that profits are reported accurately for tax purposes, maintaining a level playing field in the marketplace.