What does Arms Length Pricing ensure?

Arms Length Pricing is a principle used in international commerce and tax regulation that ensures transactions between related parties (such as subsidiaries of the same multinational corporation) are conducted as if they were between unrelated parties. The primary goal of this principle is to prevent profit shifting and ensure that income is reported accurately for taxation purposes.

By comparing the prices charged in transactions between related entities to those charged in similar transactions between unrelated parties, Arms Length Pricing safeguards fairness and transparency in pricing. This method promotes comparability, thereby helping tax authorities verify that companies are adhering to regulations regarding transfer pricing.

The other options, while related to international business practices, do not accurately describe the specific purpose of Arms Length Pricing. For instance, ensuring fair trade practices involves a broader scope of international trade regulations outside of pricing strategies, while regulation of mergers and acquisitions pertains to antitrust laws rather than pricing methods. Lastly, the standardization of tax laws globally is a complex issue that does not directly align with the Arms Length Pricing principle, which is more about establishing pricing norms rather than creating uniform tax legislation across countries.