RSM Australia

COVID-19 and transfer pricing issues: Potential JobKeeper Payment Implications

Tax Insights

COVID-19 has had a very adverse impact on the cash flows of many Australian businesses, who will be looking closely at the JobKeeper Payment regime and whether their turnover has declined by the requisite percentage. 

Further details are available via the RSM Coronavirus Resource Centre viewed here.

Australian businesses that are part of multinational groups and therefore have dealings with international related parties (IRPs) – will also be considering the transfer pricing implications of the changes brought about by COVID-19. We have separately discussed general transfer pricing issues and also particular issues in the context of financing.

Have you reviewed the transfer pricing implications that could impact your business turnover? Your JobKeeper Payment qualification may be impacted...However, changes to be introduced after a review of the transfer pricing implications of COVID-19 could have an impact on the turnover of such Australian businesses, as determined on an arm’s length basis. A natural consequence of this is that their qualification or otherwise for the JobKeeper Payment may be impacted, either positively or negatively.


Potential practical implications

A review of transfer pricing positions could have a range of impacts that may affect the turnover of Australian businesses that have dealings with IRPs. We provide three examples of situations where addressing transfer pricing positions could also positively or negatively impact the turnover of Australian businesses and potentially eligibility for JobKeeper Payments:​

  1. Type of dealing: Australian IP owners charging royalties to IRPs

Reason for performing transfer pricing review

Does the royalty rate need to be renegotiated? If the licensees of IP owned by the Australian business are deriving greatly reduced profits from its use, acting at arm’s length they may seek to renegotiate the license agreement, with a view to obtaining a reduction in the royalty payable or more favourable payment terms. This is because the IP may have less value in the current economic environment.

Impact on turnover (as defined) of Australian business

A reduction in the royalty rate would reduce the turnover of the Australian business.

  1. Type of dealing: Australian entities selling goods to IRPs

Reason for performing transfer pricing review

Is the pricing of goods sold by Australian entities correct or should this now be reduced?

Impact on turnover (as defined) of Australian business

A decrease in the arm’s length consideration for goods sold would decrease the turnover of the Australian business.

  1. Type of dealingAustralian service entities charging service fees to IRPs (including contract R&D providers)

Reason for performing transfer pricing review

Is the methodology and pricing correct or would arm’s length parties renegotiate the agreement with a view to obtaining a reduction or a “pause” in the payments?

Impact on turnover (as defined) of Australian business

A reduction or “pause” in payments of the service fee would reduce the turnover of the Australian business.

 


Integrity ruleHave you reviewed the transfer pricing implications that could impact your business turnover? Your JobKeeper Payment qualification may be impacted...

The JobKeeper Payment “integrity rules” provide for substantial penalties if an entity enters into a contrived scheme for the sole or dominant purpose of accessing or increasing entitlement to the JobKeeper Payment, including where an entity deliberately alters its business arrangements to reduce its turnover in order to meet the turnover requirements.

Although this will need to be carefully borne in mind, on the other hand, Australian businesses having dealings with IRPs will also need to comply with the arm’s length requirements imposed under Australia’s transfer pricing regime – as will their IRPs under their own domestic rules. It is highly likely that this will require a number of groups to adjust the pricing of their dealings with IRPs. On the face of it, it is hard to see that seeking to comply with transfer pricing requirements could be characterised as a contrived scheme for the sole or dominant purpose of exploiting the JobKeeper Payment regime – though this would, of course, need to be confirmed on a case-by-case basis.  However, maintaining robust and contemporary transfer pricing documentation is an important first step, as discussed below.

Document changes to transfer pricing positions

Transfer pricing policies are not “set-and-forget” frameworks but may need to be changed. The ATO’s guidance in Taxation Ruling (TR) 2014/8 affirms that taxpayers are required to update their documentation to reflect changes that are likely to have a material effect on their transfer pricing treatment. Clearly, COVID-19 will fall into this category for the vast majority of businesses.  The OECD’s Transfer Pricing Guidelines also state:

“It is a good practice for taxpayers to set up a process to establish, monitor and review their transfer prices, taking into account…whether they are performed in a stable or changing environment. “

Document changes to the business and operating environment as a result of COVID-19

A key theme running through the ATO’s PCG on the JobKeeper “integrity rules” is whether a company’s business and operating environment has or has not been significantly affected by external factors beyond its control and how the company has responded to such factors.  Such matters are ordinarily addressed in the industry analysis contained in transfer pricing documentation.  Existing industry analyses will not have been prepared in light of COVID-19 and should, therefore, be reviewed and updated to reflect how the relevant industry has been affected, including how any government-imposed restrictions have impacted the industry.


For more information

If you have any questions or require further information, please contact Liam Delahunty, director of international tax and transfer pricing today.

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