Changes to transfer pricing documentation requirements

Documentation requirements

Documentation requirements

Timing

Businesses are now required to have the transfer-pricing documentation prepared before the time the entity lodges its income tax return for the income year relevant to the matter (or matters).

Information

In addition, businesses must ensure the transfer-pricing documentation contains an arguable position of why the self-assessment position for transfer pricing outcomes contained in the tax return have been adopted.

It is now required to set out:

  • How trade is conducted within the industry of the taxpayer?
  • Must come to a conclusion as to whether or not the actual arrangements between related parties are different to what arms-length parties do in the industry; and if so
  • Is a transfer pricing benefit capable of being calculated

As you can see, the focus is not just on how price and/or profits compare, but also how business is conducted and how benchmarking analysis is undertaken to ensure like is compared with like.

The 5 Key Questions to answer:

Taxation Ruling TR 2014/8 sets out the five key questions for all enterprises to consider when documenting its transfer pricing treatment:

  • What are the actual conditions that are relevant to the matter?
  • What are the comparable circumstances relevant to identify the arms-length conditions?
  • What are the particulars of the methods used to identify the arm’s length conditions?
  • What are the arm’s length conditions and is/was the transfer pricing treatment appropriate?
  • Have any material changes and updates been identified and updated?

The ruling states:

“The ATO recommends that an entity considers all five questions (not necessarily sequentially) in light of its own facts and circumstances, including the relative complexity and materiality of its relevant dealings and its self-assessment risk”.

The transfer pricing documentation must:

  • Be prepared before income tax return lodged
  • Prepared in English or readily convertible to English
  • Explains the particular way in which Subdivisions 815B Income Tax Assessment Act 1997 (ITAA97) applies or does not apply to the matter
  • Explains why the application of 815B to the matter in that way achieves consistency with the OECD Guidelines and other material specified by regulations
  • Allow the arm’s length conditions applicable to the matter to be readily ascertained
  • Allow the particulars of the method used and comparable circumstances relevant to identifying those arm’s length conditions, to be readily ascertained
  • Allow (unless for the non-application of 815-B) the application of 815-B in a particular way as compared to the application of 815-B has for the operation of the penalty provisions in TAA53, to be readily ascertained
  • Allow the actual conditions of the entity to be readily ascertained

If you should have any queries in regards to transfer pricing documentation, please contact Judy She and Martin van der Saag to discuss in detail.

Judy She
Senior Accountant
T: 02 9984 7774
E: judys@northadvisory.com.au

Martin van der Saag
Director
T: 02 9984 7774
E: martinv@northadvisory.com.au

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