The arm’s length principle should maintain a tax-level playing field between multinational groups of taxpayers and standalone enterprises. Despite the fact that all EU Member States implemented an arm’s length principle in their domestic transfer pricing rules, differences in the application of the arm’s length principle remain. These differences create two challenges for the EU internal market. The first issue is a potentially unjustified restriction of the fundamental freedoms when the arm’s length principle is only applied in a cross-border context, thereby impeding the free and competitive allocation of resources within the EU internal market and favouring domestic transactions. The second issue is that EU Member States can use the arm’s length principle as a tax competition instrument through transfer pricing rulings that result in reduced tax liability, thereby potentially granting illegal State aid benefits. In light of these threats to the EU internal market, the subsidiarity and proportionality requirements could warrant harmonization of the arm’s length principle. However, the fundamental nature of the arm’s length principle as an open legal standard would render harmonization efforts less effective than intended.