Transfer Pricing (arm’s-length principle)
Pricing of international dealings should reflect a fair return for the activities performed.
Transfer pricing rules may apply on related party debt
International pricing transfer needs to reflect a fair return for the activities performed.
If the pricing is not in accordance with the transfer pricing rules contained in the tax legislation, it may be termed as ‘international profit shifting’
Transfer pricing can between
1) two domestic entities
2) a resident and a non-resident
Deductions are shifted to Australia – goods sold at inflated rate
Income is shifted offshore – goods sold at discounted rate
3) related parties (usually the case)
4) unrelated parties
Documentation
Subdivision 284 – E of Schedule 1 contains rules related to transfer pricing documentation that must be maintained in relation to Subdivision 815-B and C.
Documentation must be prepared before lodging the tax return and maintained in Australia.
Failure to keep adequate documentation prevents an entity from establishing a reasonably arguable position and administrative penalties will be imposed.
| Apply transfer pricing | ||
| Scenario | Scope of application | |
| An AU company provides financial advice to a related company in UK but charges less than what they would normally charge | The consideration received was less than arm’s-length and the parties are related; the transfer pricing provision may apply. There might be a commercial explanation why a lesser price was charged | |
| An AU company pays excessive interest to a non-resident related entity in UK in respect of a loan. | For example, if the parties are not dealing at arm’s-length and the taxpayer pays interest at a rate of 10% per year on a loan of $100,000 when the arm’s‑length interest rate is 5%. The taxpayer will have a decreasing transfer pricing adjustment of $2,000 [i.e. $100,000 × (10% – 5%) = $5,000] | |
Simplifying transfer pricing
The ATO has released on its website a document called ‘Simplifying transfer pricing record keeping’
This is designed to reduce compliance cost for small businesses, distributors, intra-group services and low-level loans.
If you have appropriately elected to apply any simplification options, then tax offers will not review the relevant cross border conditions between entities for transfer pricing purposes for the relevant covered transactions or arrangements, beyond conducting a check to confirm your eligibility.
Low-level inbound loans
Eligibility criteria
You have a combined cross-border loan balance of $50 million or less for your Australian economic group at all times throughout the financial year, and: for each of your inbound loans
1) your interest rate is no more than the following rate for each of the income years which the loan is in effect (3.76% in 2019 income year) 2) the funds actually provided by you under the loan are AU dollar funds and this is reflected in your loan agreements 3) your associated expenses are paid in Australian dollars.
Low-level outbound loans
Eligibility criteria
You have a combined cross-border loan balance of $50 million or less for your Australian economic group at all times throughout the financial year, and: for each of your inbound loans
1) your interest rate is no less than the following rate for each of the income years which the loan is in effect (3.76% in 2019 income year) 2) the funds actually provided by you under the loan are AU dollar funds and this is reflected in your loan agreements 3) your associated expenses are paid in Australian dollars.