Arm's length principle
The arm's length principle means using the transactional or profit results of independent parties as a guide or benchmark in allocating income or expenses in cross-border transactions with related parties.
It requires understanding what you have done in your business and whether or not your actions compare with what independent parties have done, or would have done, in the same or a similar situation.
- The process requires judgment calls by:
- your business, in how you set prices and terms of trade with related parties and how you document this policy to support your position
- the ATO in reviewing the quality of your documentation file.
For more detail on arm's length principle refer to International transfer pricing: applying the arm's length principle.