Arms length principle

The arms length principle (ALP) is the condition or

the fact that the parties to a transaction are independent
and on an equal footing. Such a transaction is known as
an arms-length transaction. It is used specically in
contract law to arrange an equitable agreement that will
stand up to legal scrutiny, even though the parties may
have shared interests (e.g., employer-employee) or are too
closely related to be seen as completely independent (e.g.,
the parties have familial ties).

employee discipline and termination of employment at

arms length through the human resources department, if
the company has one. In such cases, terminations and discipline must be rendered by sta who have the training
and certication to do so legally. This is intended to protect the employer from legal recourse that employees may
otherwise have in the event that it can be demonstrated
that such discipline or terminations were not handled in
accordance with the latest labor laws. For employees
in unionised environments, shop stewards can represent
the employee, whereas the HR department represents the
company, so that both sides are on a more equal footing
1 Examples
and can resolve matters outside of court, using informal
negotiations or a grievance, saving both sides time and
A simple example of not at arms length is the sale of money. The arms length dealings in this case mean that
real property from parents to children. The parents might both an employee and a supervisor each have a qualied
wish to sell the property to their children at a price be- advocate.
low market value, but such a transaction might later be
classied by a court as a gift rather than a bona de sale,
which could have tax and other legal consequences. To 2 See also
avoid such a classication, the parties need to show that
the transaction was conducted no dierently from how
English contract law
it would have been for an arbitrary third party. This
Say on pay
could be done, for example, by hiring a disinterested third
party, such as an appraiser or broker, who could oer a
professional opinion that the sale price is appropriate and
reects the true value of the property.
3 External links
The principle is often invoked to avoid undue government
inuence over other bodies, such as the legal system, the
press, or the arts. For example, in the United Kingdom
Arts Councils operate at arms length in allocating the
funds they receive from the government.

Transfer pricing: Keeping it at arms length

The Organisation for Economic Co-operation and Development (OECD) has adopted the principle in Article
9 of the OECD Model Tax Convention, to ensure that
transfer prices between companies of multinational enterprises are established on a market value basis. In this context, the principle means that prices should be the same as
they would have been, had the parties to the transaction
not been related to each other. This is often seen as being
aimed at preventing prots being systematically deviated
to lowest tax countries, although most countries are also
concerned about prices that fail to meet the arms length
test due to inattention rather than by design and that shifts
prots to any other country (whether it has low or high tax
rates). It provides the legal framework for governments to
have their fair share of taxes, and for enterprises to avoid
double taxation on their prots.
In the workplace, supervisors and managers deal with
1

4 TEXT AND IMAGE SOURCES, CONTRIBUTORS, AND LICENSES

Text and image sources, contributors, and licenses

4.1

Text

Arms length principle Source: http://en.wikipedia.org/wiki/Arm{}s%20length%20principle?oldid=657455602 Contributors: Bender235, Kappa, Arthena, Wikidea, Uncle G, Mikaelbook, JIP, Rjwilmsi, Jonathan Kovaciny, Tfeledy, Simishag, CambridgeBayWeather,
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