Applying the arm's length principle

In assessing compliance with the arm’s length principle, you should exercise commercial judgment about the nature and extent of documentation appropriate to your circumstances. Both the ATO and the OECD state that businesses only need to reasonably assess whether their dealings with related parties comply with the arm’s length principle. They should not be expected to prepare or obtain documents beyond the minimum needed to do this.

Businesses should consider the level of certainty they wish to achieve, taking into account the impact of international dealings with related parties on their overall business. This assessment will determine the level of risk to which a business is exposed.

Businesses risk having a transfer pricing audit if they do not have proper processes to determine arm's length prices and cannot demonstrate to us the methods they've used to determine their prices. They also risk a transfer pricing adjustment and penalties as a consequence of any audit.