Arm's length pricing methods
The arm's length principle is the statutory test for pricing related-party international dealings. The principle is incorporated into the associated enterprise article in each of Australia's double tax agreements.
Taxation rulings TR 97/20, TR 1999/1 and NAT 2726 International transfer pricing: applying the arm's length principle, explain the operation and suitability of each of the methods mentioned below for particular circumstances.
It is not possible to identify all the circumstances under which the various methods will produce valid results, and a method's appropriateness for any given transaction must be determined from all the circumstances of the dealing. You should use the method that produces the highest practicable degree of comparability.
There are two main groups called traditional transaction methods and transaction profit methods.
Codes 1 to 3 represent the traditional transaction methods and provide the most reliable measure of an arm's length result. Codes 4 to 5 represent the profit methods and codes 6 to 12 are other methods.