RSM Australia

Simplified transfer pricing record keeping for SMEs

Spreading Christmas cheer (with a healthy dose of caution required) 

On 22 December 2014, the Australian Taxation Office (ATO) delivered some Christmas cheer to small-to-medium sized enterprises (SMEs) who qualify for the new ‘Simplified transfer pricing record keeping’ regime, relieving them of the arduous task of preparing transfer pricing documentation.

Should a taxpayer self-assess their eligibility to one or more of the simplification record-keeping options, the ATO has undertaken not to allocate compliance resources or take other compliance action to examine a taxpayer’s transfer pricing records before 2016. Taxpayers that are eligible for simplified transfer pricing record keeping are not ameliorated from the need to comply with the transfer pricing rules, as referenced at Criteria F below.

Taxpayers will still need to assess whether their international related party transactions are conducted in accordance with arm’s length conditions.

The following is a non-exhaustive summary of the conditions upon which a taxpayer may qualify for the simplification regime. Taxpayers are recommended to seek advice from RSM to fully assess their eligibility. 

Taxpayer/transaction type

Qualification Parameters

Applicable criteria
(See table below)

Small business taxpayers

Between A$0 and A$25m for the Australian operation

A & B & C & D & E & F

Distributors

Between A$0 and A$50m for the Australian operation

A & B & C & D & F & G

Intra-group services dealings

You have service dealings of either;

  • $1m or less – the de minimis rule; or
  • greater than $1m, but for services you;
    • receive: the total amount charged to you must not be more than 15% of the total expenses of the Australian operation
    • provide: the total amount derived by you must not be more than 15% of the total revenue of the Australian operation.

A & B & C & F & H

In-bound loans

You have a combined cross-border loan balance of $50m or less for the Australian operation at all times throughout the financial year

A & B & C & F & I

The simplification options do not apply to:

  • outbound related-party interest-bearing loans and associated charges
  • other international related-party financial transactions (for example, guarantees) and associated charges
  • international related-party dealings of a capital nature

Eligibility Criteria

Criteria A

The entity has not derived sustained losses

(three or more consecutive years, including the year to which the simplified measures apply)

Criteria B No related party dealings with ‘specified’ countries (tax havens)
Criteria C No restructure has been undertaken within the year
Criteria D No dealings involving:
  • royalties
  • licence fees
  • R&D
Criteria E Do not have specified service related-party dealings (either as expenses or as income) greater than 15% of your turnover
Criteria F You have assessed your compliance with the transfer pricing rules
Criteria G Your profit-before-tax ratio is not less than 3%
Criteria H You have a mark-up on costs of the relevant services of either:
  • 7.5% or less for services you receive
  • 7.5% or more for services you provide
Criteria I For your inbound loans
  • your interest rate is no more than the Reserve Bank of Australia (RBA) indicator lending rate for 'small business; variable; residential-secured term'
  • the funds actually provided to you under the loan are Australian dollar funds and this is reflected in your loan agreements
  • your associated expenses are paid in Australian dollars

Background to the changes

Australia’s new transfer pricing rules apply to taxpayers with international related party dealings (IRPDs) for income tax years commencing on or after 29 June 2013. A draft transfer pricing ruling addressing documentation requirements to comply with Australia’s new transfer pricing rules added to the compliance burden of preparing transfer pricing documentation.

Whilst the preparation or keeping of transfer pricing documentation is not mandatory, the consequence of not meeting the extensive documentation requirements and associated quality thresholds is that the entity will not have a reasonably arguable position (RAP), and a higher base penalty amount in the event of an adverse transfer pricing adjustment will apply.

Aligning with OECD commentary, importantly, the ATO has now recognised that SMEs who seek to comply with all aspects of the new requirements in the course of preparing transfer pricing documentation may incur costs and associated management time that is disproportionate to the attendant transfer pricing risk.

Disclosure measures

Those taxpayers that fall within the simplified transfer pricing record keeping regime will still be required to complete and lodge an International Dealings Schedule (IDS) with their annual income tax return if they have more than $2m of related-party dealings.

Taxpayers eligible to apply a simplified record-keeping option simply include ‘Code 7’ at the percentage of documentation label code on the IDS. This confirms that the taxpayer has assessed its situation as complying with the transfer pricing rules and advised the ATO that a simplification option has been applied to your record keeping.

This code is not available for the 2014 year.

Our view

The new requirements are a significant step forward by the ATO in recognising that documenting transfer pricing can be a costly and time consuming experience for SMEs, however we suggest exercising significant caution in applying these measures. Whilst we believe there is more work to be done by the ATO to make life easier for SMEs, we are pleased to see that the ATO has demonstrated a willingness to collaborate with multinationals and practitioners in developing pragmatic measures and reasonable alternatives in transfer pricing record keeping practices.

Recommendations

Such simplification measures can be a double-edged sword for taxpayers. Those that (inadvertently) do not qualify but have relied upon the simplification measures are also unlikely to have the necessary documentation to support a RAP for their IRPDs. The lack of maintaining a RAP therefore increases the potential penalties applicable to a transfer pricing related tax shortfall.

Consequently we strongly recommend that taxpayers seek advice on their eligibility to fall within the simplified transfer pricing documentation regime and with the preparation of their IDS.

Should you wish to discuss the potential application of the simplification measures to you, we would be pleased to assist.


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