Transfer Pricing & Safe Harbour Provisions
Posted by Northadvisory on August 22, 2017
In this blog post we provide an overview of the following:
1. Transfer Pricing Rules
2. Simplified Transfer Pricing Documentation Requirements
3. 2016 International Dealings Schedule
Transfer Pricing Rules
The scope and complexity of Australia’s transfer pricing regime has increased considerably following the recent enactment of more stringent and robust domestic transfer pricing rules.
The new self-assessment regime effectively requires every taxpayer with international related party transactions to:
• Self-assess its compliance, regardless of the size of the transaction.
• Consider whether related party dealings are conducted in a manner consistent with current transfer pricing legislation (i.e. no tax benefit derived)
• Prepare and maintain transfer pricing documentation to demonstrate that the taxpayer’s cross-border transactions are at arm’s length in accordance with the transfer pricing legislation
• Complete this before lodging the income tax return for the year in which those transactions occur.
This is the duty of the public officer signing the tax return.
Such documentation must provide details of:
• the actual and arm’s-length conditions of each cross-border transaction
• the arm’s length methodology selected to determine those arm’s length conditions;
• the comparability factors used in identifying the arm’s-length conditions, and
• the application of the selected arm’s length methodology to the particular cross-border transaction.
Where such contemporaneous documentation is not prepared the entity will not be able to demonstrate that it has a reasonably arguable position (RAP) in contesting any penalties later imposed on any tax shortfall (i.e. underpayment of tax), should a transfer pricing adjustment later be made by the ATO in relation to that tax year.
Taxation Ruling TR2014/8 further clarifies the records that must be kept in order for a taxpayer to develop a reasonably arguable position whilst the application of the penalty provisions is discussed in Practice Statement PSLA 2014/3.
Simplified Transfer Pricing Documentation Requirements
Practice Statement PS LA 2014/3 allows certain smaller taxpayers the option of meeting simplified transfer pricing documentation requirements.
This allows taxpayers to lessen the costs associated with preparation and retention of contemporaneous transfer pricing documentation for either some or all of their IRPDs, provided certain eligibility criteria are satisfied
In place of full documentation, taxpayers can instead prepare a document detailing their eligibility for the simplified rules. The ATO will not allocate resources to audit these companies, however will only check each entity’s eligibility for these rules. The taxpayer is required to self-assess for these rules.
Where these simplified options are applied, eligible taxpayers will not be liable for a 25% penalty if they do not have a reasonably arguable position because they do not have full transfer pricing documentation. However, such taxpayers are not relieved of their broader obligation to ensure that all their cross-border transactions are compliant with the transfer pricing rules.
The Practice Statement refers to an on-line guidance product ‘Simplifying transfer pricing record-keeping’ which sets out the range of smaller taxpayers who can apply this safe harbour documentation option for the year ended 30 June 2016.
A copy of the guidance can be downloaded from the ATO website.
Summary of the categories of smaller taxpayers entitled to apply the simplified record-keeping option:
|Materiality||IRP Transactions < 2.5% of total turnover for Australian group + other conditions|
|Small Taxpayers||Total Turnover < $25 M for Australian group + other conditions
Cannot apply to Distributors.
|Distributors||Total Turnover < $50 M for Australian group + other conditions|
|Intra-Group Services||Related Party Services of $1M or less + other conditions|
|Technical Services||50% or less of total related party dealings + other conditions|
|Management & Administrative Services||Mark ups of:
-5% or more for relevant services provided to IRP
-5% or less for relevant service received from IRP
+ other conditions
|Low-Level Loans (inbound)||Combined cross-border loan balance <$50 at all times through the financial year
Interest rate used is < the RBA Indicator lending rate for ‘small business variable residential-secured term’;
Loans and associated costs are transacted in AUD & this is reflected in the loan agreements.
|Low-Level Loans (outbound)||Combined cross-border loan balance <$50 at all times through the financial year
Where interest rate applied for income year is no less than:
-4.91% in 2015
-4.37% in 2016
-4.34% in 2017
+ other conditions
Some of the options may be subject to additional eligibility conditions which must be met.
In particular, the options for small business taxpayers, distributors, low level in-bound loans and intra-group services will not be available if the taxpayer has sustained tax losses for three consecutive years (including the current year) or has undergone a restructure in the current income year.
The above simplified record keeping option does not apply to:
• international related-party financial transactions in a low-tax jurisdiction
• international related-party dealings of a capital nature.
Importantly, the IDS requires disclosures on:
• % of dealings covered by documentation
• Transfer pricing method used to price the transaction
• Quantum and countries involved
• Whether a restructure has occurred during the year
• Any dealings with specified countries
• Any related party transactions which were capital in nature
The ATO uses the IDS heavily as the first port of call.
It is relied upon by the ATO for risk analysis, case selection and risk profiling for Multinational Anti-Avoidance Law cases.
The current ATO focus is on:
The current ATO focus is on:
• Thin capitalisation
• Marketing / procurement hubs
• Management fees/services
• Offshore digital tax structures
• IP migration
• Related party financing
If you are eligible to apply a simplified record-keeping option because you are an eligible small taxpayer, then at the relevant labels on the IDS you would include code 7 at the percentage of documentation label code. This confirms that you have assessed your situation as complying with the transfer pricing rules and advised the ATO that a simplification option has been applied to your record keeping.
In closing, we reiterate the transfer pricing rules now operate on a self-assessment basis, and that public officers must turn their minds to the veracity of the pricing of their cross-border transactions before signing and lodging returns.
If you have further queries on this matter, please do not hesitate to contact Judy She or Martin van der Saag on 02 9984 7774.
Martin van der Saag
T: 02 9984 7774
T: 02 9984 7774