Transfer pricing documentation is vital for several reasons: 1. Compliance: It ensures that the MNE complies with the transfer pricing regulations of the countries in which it operates. 2. Avoiding Penalties: Proper documentation helps avoid hefty penalties and adjustments from tax authorities. 3. Transparency: It provides transparency and supports the arm's length principle, which states that transactions should be conducted as if they were between unrelated parties. 4. Risk Management: Good documentation helps in managing tax risks and defending the company's pricing policies during audits.