The arm's length concept is a key notion under the Transfer Pricing framework and is defined as follows: Arm’s length principle is the international standard that OECD member countries have agreed should be used for determining transfer prices for tax purposes. It is set forth in Article 9 of the OECD Model Tax Convention as follows: where “conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly”. Overall, under the arm's length principle the intra-group transactions should be priced as if the parties to the transaction were unrelated. To do so the OECD developed an extensive framework to ensure/document the arm's length nature of intra-group transactions.

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