In NetSuite, intercompany inventory transfer orders can be classified into two types: arm’s length and non-arm’s length. These terms refer to the pricing used when transferring goods between subsidiaries within the same company.
An arm’s length transfer order means the goods are transferred at a price that reflects fair market value, as if the two subsidiaries were independent entities. This ensures compliance with tax regulations, specifically transfer pricing rules, which require companies to treat related party transactions like they would with unrelated third parties. It’s called “arm’s length” because the pricing distance is fair, as though the two entities are at “arm’s length” from each other, rather than acting as part of the same organization.
A non-arm’s length transfer, however, uses an internal price that may not match market rates. This might happen for internal cost-sharing purposes or based on company policy. Non-arm’s length transfers are typically documented separately for tax purposes, as they don’t reflect external market transactions.