Arm’s Length Principle in Tax Transactions:

• The arm’s length principle states that if conditions made or imposed between associated enterprises in their commercial or financial relations differ from those which would have been made between independent enterprises, then the profits that, but for those conditions, would have accrued to one of the enterprises may be included in the profits of that enterprise and taxed accordingly.
• This principle ensures that transactions between related parties (such as subsidiaries, affiliates, or other entities with common ownership) are conducted as if they were between unrelated parties, each acting in their own best interest.
• The aim is to prevent profit shifting and ensure that the correct amount of taxable income is reported in the relevant jurisdiction where the economic activities generating the profits occur.
• Taxable profit is to be computed on the basis that transactions between related parties take place on the same terms as those between unrelated parties (independent entities).