From 1 July 2014, Australia’s transfer pricing law obliges Australian taxpayers to structure their international related party transactions based on arm’s length terms and conditions (the arm’s length principle). Part of a taxpayer’s compliance with the arm’s length principle requires the taxpayer to maintain documentation which specifically justifies why international transactions meet the arm’s length principle and other specific transfer pricing criteria.
Keeping compliant transfer pricing documentation in relation to your international dealings is valuable because:
- If the ATO reviews your international transactions, it shows you understand and have thought about your international business arrangements (good business governance), you can easily provide appropriate documents and this may reduce the risk of the ATO identifying any tax underpayments arising from transfer pricing benefits; and
- If an ATO review ever identifies that you have underpaid tax in Australia because of a transfer pricing benefit you received, you have a Reasonably Arguable Position and you can reduce your exposure to penalties.
If your business has $2 million or more of transactions with international related parties each year, your level of compliance with the transfer pricing regime and related documentation requirements is highly visible to the ATO via the disclosure required in the International Dealings Schedule (IDS) attachment to your income tax return.
The ATO has now officially recognised that the administrative burden of complying with the increased transfer pricing documentation requirements may be disproportionate to a business’s risk of not complying with the transfer pricing rules. To reduce the administrative burden faced by low risk businesses, the ATO has released a Practical Compliance Guideline titled Simplified Transfer Pricing Record Keeping Options (the Guidelines).
Benefits
The administrative compliance cost savings from accessing the safe harbours are likely to be significant for eligible entities applying the Guidelines.
Importantly, the benefits are not limited to only small and medium sized businesses. The some safe harbours offer reduced administrative costs for other specific taxpayer categories.
Eligible businesses will not be subject to the ATO’s compliance resources beyond reviewing the eligibility to use the Guidelines. If an entity is eligible to apply the Guidelines, it is critical that contemporaneous documentation is available in support of its eligibility.
While the record keeping requirements are simplified, the Guidelines do not alleviate an entity’s general record keeping obligations such as keeping contemporaneous loan agreements, service agreements and the other usual documents which substantiate transactions for tax purposes.
The Guidelines
The Guidelines provide an opportunity to significantly reduce the transfer pricing administrative costs for eligible entities. To be eligible, an entity must fit into one of the eight ‘low-risk’ safe harbour categories provided by the ATO. The eligibility requirements for each category are detailed and will be strictly reviewed by the ATO.
The ATO has provided the following eight safe harbour categories:
| Small taxpayers: Australian group turnover under $25 million, and other conditions |
Intra-group related party services: $1 million or less, and other conditions |
Low materiality: Related party dealings 2.5% or less of total Australian turnover, and other conditions |
Technical services: 50% or less of total related party dealings, and other conditions |
| Distributors: Australian group turnover under $50 million, and other conditions |
Low-level inbound loans: Combined loan balances of $50 million or less, and other conditions |
Low-level outbound loans: Combined loan balances of $50 million or less, and other conditions |
Management and administrative services: 50% or less of total related party dealings, and other conditions |
Importantly, each safe harbour category has a number of very specific access conditions. Taxpayers must visibly meet and document why they meet ALL specific access conditions in order to apply a particular safe harbour method. The ATO will not allow taxpayers to make any assumptions that they fit within a broad safe harbour category or meet one or more access conditions.
As an example, some access conditions for particular safe harbour categories are:
- The business has not derived sustained losses for 3 or more consecutive years;
- The business has no related-party dealings with entities in known tax havens;
- No ‘restructures’ have occurred with your business in Australia or overseas;
- The business has no related party transactions related to royalties, license fees or Research & Development; and
- The business has assessed its compliance with the normal transfer pricing law.
Next Steps
To discuss the value that the Guidelines can provide to your business, please contact your local tax advisor
