![]() ![]() ![]() When dealing in commodities, arm’s length in transfer pricing is rather straightforward, and can be as easy as researching comparable transactions. For example, the arm’s length price must be the same as what the price would be on the open market. The arm’s length in transfer pricing principle states that the amount that is charged by one party to the other party in the transaction must be the same as if the parties were not related. This then results in a loss that the seller is implying that he is willing to accept in giving the buyer a discount on the property. The taxes are based on the fair market value of the property, not the discount that one party may choose to give to another. For instance, using the example presented above, if a mother sells her house to her daughter at a discounted rate, tax authorities are within their right to force the mother to pay taxes on the gain she would have received if she had sold the house to a neutral third party, rather than her son. The taxation on a piece of property also significantly varies between a non-arm’s length transaction and an arm’s length transaction. This is especially true if the seller provided the buyer with a loan, as opposed to sending the buyer to a mortgage lender. Because the seller knows the buyer will be sympathetic to his situation, he may end up asking the buyer for more money. It may seem easier to purchase a house from a friend or a relative, but risks still exist within such a transaction.įor instance, the financial situation of the person selling the house in a non-arm’s length transaction can change. The relationship in a non-arm’s length transaction can be of a personal or professional nature, and it can exist between the buyer and the builder, the developer, or the seller. Non-arm’s length transactions are transactions that exist between people who already have an existing relationship. For instance, a mother who is selling her house to her daughter is more likely to give her daughter a discount on the property, rather than charge her a price at or close to fair market value, which may be significantly higher. However, in situations where the parties are not strangers, which are referred to as “non-arm’s length transactions,” it is less likely that the price offered and/or obtained for the property is close or equal to fair market value. Therefore, it is more likely that the final agreed-upon price is at, or close to, fair market value. For instance, when two strangers are parties to a real estate transaction, the seller wants to charge the highest possible price for that property, and the buyer wants to pay the lowest possible price for that property. This also reassures any potential third parties to the transaction that no collusion exists between the buyer and the seller.Īrm’s length transactions must be conducted in real estate transactions to ensure that the price being offered for the property is consistent with the fair market value for that property. ![]() Arm’s length transactions ensure that each party is acting in his own self-interest, and that neither party is being pressured by the other party to go ahead with the transaction. Arm’s Length TransactionĪrm’s length transactions are transactions wherein the buyers and sellers to the transaction have no prior relationship with each other. The arm’s length principle here ensures that the employer and the employee each have an unbiased and qualified advocate on his side. This is done to protect the employer from any lawsuits that the employee may be able to bring upon being terminated, should he be terminated in a way that deviates from the labor laws within that jurisdiction. While the employer and the employee do have a prior relationship with each other, the termination itself is conducted by a neutral third party who is not a party to that relationship. The arm’s length principle also helps guide transactions insofar as appropriate taxation is concerned.Īn example of the arm’s length principle at work involves a supervisor’s use of the company’s human resources department to fire an employee. In consideration of the arm’s length principle, parties are considered independent of each other when they are not related to each other in the familial sense, nor have they engaged in any prior deals with each other, and have no side deals with each other. The arm’s length principle is a condition in which the parties to a transaction have no prior relationship with each other, and that they are equal parties to the transaction. ![]()
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