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New Australian Simplified Transfer Pricing Record-Keeping Options

Tax Alert - April 2015

Transfer pricing has been an area of focus for the Australian Taxation Office (“ATO”) in the last few years. 

In mid-2013 new Australian transfer pricing laws were passed impacting Australian members of multinational groups.  In essence, the new rules have had the effect of increasing the transfer pricing compliance burden on the taxpayer, while at the same time giving the ATO far reaching powers to “reconstruct” transactions if they see fit to do so and increasing the risk of review and penalties if transfer pricing documentation for the relevant income year is not prepared and held by the Australian operations by the time of filing the tax return.

Acknowledging that compliance can be costly, particularly for smaller businesses, the ATO has subsequently developed some simplified transfer pricing record keeping options.  Eligible businesses can opt to apply the rules and minimise some of their record-keeping and compliance costs.  The options are set out in “Practice Statement Law Administration PS LA 2014/3 Simplifying transfer pricing record keeping” (PS LA 2014/3) which was released on 17 December 2014. 

The rules may enable taxpayers to meet compliance obligations with a reduced level of transfer pricing documentation and, in particular, benchmarking studies. Further, certainty for taxpayers may be increased with the simplification as there is upfront knowledge of how the eligible transactions should be priced.

However there remains some uncertainty as to the extent to which the simplification options will reduce the transfer pricing documentation requirements for the taxpayer.  In practice the new rules may eliminate the requirement for benchmarking in documentation but add the requirement to evidence that the criteria are met.  The ATO is in the process of preparing additional guidance to clarify these matters.

There are four main transfer pricing documentation simplification options for specific categories of taxpayers and transactions.  The categories are summarised below, along with the key eligibility criteria:

Category

Eligibility Thresholds

and Taxpayer Has 

 

Small businesses

 

$0 - $25m turnover for
Australian group

No related-party royalties, license fees or R&D

No specified service related-party dealings* of more than 15% of turnover

Distributors

$0 - $50m turnover for
Australian group

3 year average Profit Before Tax ratio of at least 3%

No related-party royalties, license fees or R&D

No specified service related-party dealings* of more than 15% of turnover

Intra-group services

Up to $1m of services
or
limited to 15 % of expenses / revenue

7.5% or less / more mark-up for services received / provided

No specified service related-party dealings*

Low-value loans

Loans of $50m or less for Australian group

Interest rate on inbound related-party loans no greater than Reserve Bank of Australia indicator lending rate

All principal and expenses amounts in AUD

In addition to the eligibility criteria listed above, entities are also ineligible under all categories if they have:

  • Incurred operating losses for 3 consecutive years;
  • Undergone a restructure within the year; or
  • Related-party dealings with entities in “specified countries” (broadly, low tax rate jurisdictions).

While the new rules will certainly be helpful from a compliance perspective for some Australian taxpayers, as shown above, there are several criteria which must be met before the options can be applied, and care must be taken to confirm that a taxpayer can satisfy all the requirements of a particular category before application. This will still involve a certain level of compliance albeit at a far more simplified level.

It is therefore important for New Zealand groups with associated parties in Australia (at a minimum) to:

  1. Review the Australian entity’s  or branch’s cross border associated party transactions or dealings;
  2. Assess whether the entity or any of the transactions/dealings entered into fall within the 4 categories above, and therefore whether relief can potentially be sought;
  3. Carefully consider all the eligibility criteria to confirm whether the option can be applied;
  4. Consider the appropriate level of documentation that should be prepared to demonstrate compliance with the simplification option.

If you require further guidance or for more information on whether these rules will apply to your Australian operations please contact a member of the Deloitte transfer pricing team who will help you navigate your way through the new rules.  

 

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