Are you one of the lucky taxpayers that do not have to keep transfer pricing documentation?
What happened?
As you are aware, having suitable Australian transfer pricing documentation1 in place is a necessary requirement for any multinational doing business in or with Australia to justify that their 3rd party dealings are on arm’s length terms2.
This is because globally prepared transfer pricing documentation may not be suitable for Australian compliance purposes and without Australian documentation, you will not be able to apply for a remission of penalties in case of an adverse ATO audit.
Unfortunately, preparing such documentation can be an onerous task and places a significant cost and compliance burden on affected taxpayers.
It is therefore encouraging to see that late last year, the ATO developed some simplified transfer pricing record keeping options3 whereby qualifying entities can opt-out from the documentation requirements and still be protected from the ATO scrutinising the documentation of their 3rd party dealings.
These safe harbour rules apply for a period of 3 years (for income years starting on or after 29 June 2013) to certain entities (e.g. small business taxpayers and distributors) and certain types of transactions (e.g. intra-group services and low level loans).
Who are eligible to apply the simplified record- keeping options?
- Small taxpayers: turnover < $25m
- Distributors: turnover < $50m
- Intra-group services: ≤ $1m or > $1m with certain conditions
- Low level loans: ≤$50m
Eligibility for the simplified record-keeping options depends on the type of entity and the type of transaction conducted.
Type of entity & simplified record-keeping options
Small taxpayers (e.g. entities with an aggregated turnover of less than $25 million) that do not have certain related-party dealings4 greater than 15% of turnover and distributors (e.g. wholesale businesses with an aggregated turnover of less than $50 million) that do not have a profit-before-tax ratio of less than 3%, may apply simplified record-keeping for their international related party dealings provided they do not:
- Derive sustained losses (i.e. incurred losses in 3 consecutive years – including the current year);
- Have related-party dealings with entities in certain specified countries (i.e. certain so-called “tax haven” countries);
- Undergo a restructure in the current year; or
- Have any related party dealings involving royalties, licence fees or R&D arrangements.
Type of transaction & simplified record-keeping options
Broadly, any entity may apply simplified record-keeping to their qualifying intra-group services (i.e. international related-party service dealings of less than or equal to $1 million or if more than $1 million, the total amount charged / derived must not be more than 15% of total expenses / revenue of the Australian economic group5) and have a mark-up on costs for the relevant services of either:
- 7.5% or less for services you receive; or
- 7.5% or more for services you provide.
Furthermore, any entity may apply simplified record-keeping to their qualifying low level loans (i.e. inbound loans - loans from non- residents to the Australian group of $50 million or less).
It is important to note that neither the intra-group services nor low level loans record-keeping exemptions apply to:
- Outbound related-party interest-bearing loans & associated charges (it only applies to inbound low level loans as mentioned above);
- Other international related-party dealings (it only applies to the intra-group services as mentioned above);
- Other international related-party financial transactions (e.g. loans and guarantees) and associated charges; and
- International related-party dealings of a capital nature.
It is unfortunate that the safe harbours only apply to inbound transactions (e.g. overseas groups who loan monies to their Australian groups) and not to outbound transactions (e.g. Australian groups who loan monies to their overseas groups).
What does this mean for you?
You can self-assess whether you are eligible for these safe harbours.
If you are able to self-assess6 that you are eligible for the opt-out safe harbour rules and elect to apply the simplified record-keeping option, you still need to ll in the International Dealings Schedule (however, instead of specifying a percentage (in dollar terms) for which you have documentation, you simply insert the number 7 in the schedule).
Although the 3 year temporary safe harbour rules provide a respite from the record keeping requirements, you will still be required to ensure that you charge arm’s length prices for your goods and services.
Provided you qualify for the simplified record-keeping options, these safe harbour rules merely deem you to be a low audit risk case – you must still comply with the law and ensure your international dealings reflect parties dealing at arm’s length.
Therefore, we would recommend that you still keep records to be able to justify that you are dealing at arm’s length (even though the ATO said they would not allocate compliance resources to examine your transfer pricing records).
How can Nexia Australia help you?
To comply with Australian transfer pricing rules can be a daunting task – especially because you have to consider a number of factors – i.e. the overall commerciality of the arrangement as well as the pricing of individual transactions – to determine whether a transaction is on arm’s length terms.
If you have transfer pricing issues in your business, we would recommend that you speak to your Nexia advisor so that we can help you identify potential transfer pricing risks and opportunities.
1 - Subdivision 284-E of Schedule 1 to the TAA 1953 and TR 2014/8 sets out what transfer pricing documentation should be kept.
2 - For a background on Australian transfer pricing rules, please see our alert in August 2014 on the Nexia website.
3 - PS LA 2014/3 on 17 December 2014 and ATO document entitled “Simplifying transfer pricing record keeping” on 22 December 2014.
4 - Examples of such specified service related-party dealings include development of various forms of intellectual property and know how, financial trading and execution activities, insurance activities, investment and asset management activities, R&D activities, software development activities and strategic sales, marketing and relationship management and related activities.
5 - All the entities (whether companies, partnerships, superannuation funds or trusts) required to be included in consolidated financial statements according to Australian accounting standards.
6 - The ATO will closely scrutinise whether entities that chose this op-out safe harbour mechanism, were in fact eligible to use it.
