InvestorWords.com

The price at which two unrelated and non-desperate parties would agree to a transaction. This is most often an issue in the case of companies with international operations whose international subsidiaries trade with each other. For such companies, there is often an incentive to reduce overall tax burden by manipulation of inter-company prices. Tax authorities want to insure that the inter-company price is equivalent to an arm's length price, to prevent the loss of tax revenue.

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