If your business buys from, sells to, borrows from or provides services to related parties, the prices you charge must reflect what independent parties would agree — the arm’s length principle. Good documentation is how you demonstrate that.
Start with a clear policy
A written transfer pricing policy sets out how each type of related-party transaction is priced and why. It should be approved, applied consistently and reviewed as the business changes.
What your documentation should cover
- Group and business overview — structure, ownership and the main activities of each entity involved
- Description of transactions — goods, services, financing, royalties and any other related-party flows, with amounts
- Functional analysis — the functions performed, assets used and risks assumed by each party
- Method selection — the transfer pricing method chosen and why it is the most appropriate
- Benchmarking — comparable data supporting the arm’s length range
- Intercompany agreements — signed agreements that match how the transactions actually work
Keep it current
Documentation prepared once and never updated quickly loses its value. Review it when your business model, pricing or group structure changes, and refresh benchmarking periodically.
Be ready for questions
Transfer pricing is a frequent focus of tax audits. Having documentation ready — rather than preparing it after a query — puts you in a much stronger position.
This article is general information and is not tax advice. Talk to us about your specific circumstances.