What does arm's length mean in a tax context?
It is a standard of comparison, not a description of behaviour. A controlled transaction is priced as it would have been between independent enterprises in comparable circumstances. Two things follow. The first is that the enquiry is hypothetical: what would unrelated parties have done, given the same functions, assets, risks, markets and alternatives. The second is that the comparison has to be with circumstances that are genuinely comparable, which is where most of the work lies. Related parties can deal perfectly honestly and still not be at arm's length, because they face options and constraints an independent party would not.
How do you prove a price was at arm's length?
By evidence about the transaction and about whatever you are comparing it with. That means establishing what each party actually did, which assets it used, and which risks it carried and was capable of controlling, then finding dealings between independent parties that are comparable on the points that affect price. Where they differ in ways you can measure, the comparison can be adjusted; where they differ in ways you cannot, the comparison is not usable and something else has to carry the position. Proof here is cumulative rather than decisive. A reasoned analysis supported by contemporaneous records is what the standard asks for.
Is a price arm's length if both companies agreed to it?
Agreement between parties under common control is not evidence of an arm's length price, because the same interest sits on both sides of the table. A written contract matters for what it tells you about the intended allocation of functions and risks, and it is worth having. It does not establish the price. Where the contract and the actual conduct differ, the conduct governs: if a party bears a risk in practice that the agreement places elsewhere, the analysis follows practice. The useful question is not whether both signed, but whether either would have signed had they been unrelated.
Can a loss-making subsidiary still be at arm's length?
It can, but it depends on which party bears the risk that produced the loss. An independent enterprise takes losses from time to time, so a loss is not itself a failure of the standard. What is hard to sustain is a subsidiary that carries little risk, performs a limited function and nonetheless absorbs losses year after year, because an independent party in that position would not have accepted them indefinitely. So the analysis turns on the risk allocation and whether conduct matches it, rather than on the result in any single year.
Does arm's length mean there is one correct price?
Rarely. Comparable independent dealings normally produce a range of outcomes rather than a single figure, and a price anywhere within a properly constructed range satisfies the standard. This has two practical consequences. A result inside the range does not need defending to a point, and an authority cannot insist on the midpoint simply because it prefers it. But a result outside the range does need to be brought in, and where an adjustment is made, the point chosen within the range has to be reasoned rather than convenient.
Who has to show the pricing meets the standard?
In practice the taxpayer builds the case. The group holds the facts about what each entity did and why prices were set as they were, and the record-keeping obligations are placed on it accordingly. An authority proposing an adjustment has to explain the basis on which it says the standard is not met, and that basis can be argued with. But the sequence is uncomfortable if no contemporaneous analysis exists: the group is then reconstructing its own reasoning while responding to someone else's. Building the analysis while the facts are fresh is what makes the burden manageable.
What is the difference between a master file and a local file?
The master file describes the group as a whole — its structure, where value is created, how intangibles and financing are held. The local file covers one entity's own related-party transactions in detail, with the analysis supporting each price. Larger groups file both, plus country-by-country reporting above a size threshold, and the thresholds differ by country. See master file vs local file.
Is moving money between my own accounts in two countries taxable?
Moving your own capital between your own accounts is not itself income, so the transfer is not what creates tax. What can create tax or reporting is the income the money earned before it moved, a foreign-exchange gain on certain holdings, and the reporting obligations the balances themselves trigger — foreign account and asset reports keyed to balances rather than income. Remittances out of some countries also need certification before the bank will send them. See foreign account reporting.
