Transfer pricing is the number one commercial and fiscal issue facing companies with intra-group international transactions. The ATO, along with tax authorities from other jurisdictions, are aggressively seeking out what they perceive as their 'fair share' of the corporate tax pie. Jurisdictions with 'mature' transfer pricing regimes have invested heavily in recruitment and initiated more targeted and sophisticated transfer pricing reviews. On the other hand, countries which previously had little or no transfer pricing legislation, or Guidelines, have rapidly been introducing them in order to redress this perceived imbalance.
As a consequence, taxpayers should expect that their cross-border international transactions will face intense scrutiny both domestically and internationally from fiscal authorities.
Australia, together with other OECD member and non-OECD countries, bases its transfer pricing rules on the 'arm’s length principle'. In essence, all international transactions, of whatever nature, between related parties, must be in accordance with this principle.
Actual transactions will be reviewed as if they occurred between third parties under arm’s length conditions and must be disclosed, (International Dealings Schedule) documented and justified accordingly.
Australia’s transfer pricing regime has recently undergone significant and fundamental change.
Now operating on a self-assessment basis, Australia’s transfer pricing rules are now some of the world’s most advanced and political. Multinational companies are well advised to maintain strict vigilance in ensuring that they prepare transfer pricing documentation in accordance with the Australian Taxation Office (ATO)’s strict expectations. Taxpayers need to satisfy the minimum requirements to maintain a Reasonably Arguable Position (‘RAP’) in the event of an adverse transfer pricing adjustment.
Regarding the risk of not preparing and maintaining contemporaneous transfer pricing documentation, we note that Australia’s new transfer pricing rules provide for particularly harsh penalties where a transfer pricing adjustment is made by the Commissioner and documentation is not maintained.
There is no longer a focus on arm’s length price but arm’s length conditions including profit outcomes. This is a five-step process.
The ATO’s most recent public rulings prescribe a new five-step process taxpayers must follow in the documentation of their transfer pricing position. RSM would be pleased to assist you in preparing and maintaining your transfer pricing documentation.
As a critical part of the company income tax return, the ATO requires taxpayers to file an International Dealings Schedule (‘IDS’). Where the aggregate amount of transactions or dealings of income or capital nature (including average loan balances) with international related parties is greater than A$2m.
The IDS is the ATO’s first line of sight into a taxpayer’s intercompany dealings, providing large volumes of readily accessible information based upon the disclosures made regarding the following areas:
Business restructuring activities and branch dealings are also examined in significant depth within the IDS. Accurate preparation of your IDS is critical to ensure that unnecessary transfer pricing reviews and/or audit procedures are averted.
Should you require assistance in preparing or reviewing your IDS disclosures, we would be pleased to assist you to do so.
The ATO takes a risk-based approach to transfer pricing matters. Hence, getting the IDS right is critical. The ATO traditionally use the information obtained from the IDS, along with other information, to prepare a risk profile of a taxpayer, with a view to conducting in-depth transfer pricing risk reviews and/or audits where the commerciality of the dealings do not strictly accord with ATO expectations.
Preparing comprehensive transfer pricing documentation on a contemporaneous basis is the single most important component in making robust disclosures regarding the level of documentation and arm’s length method employed. Strong IDS disclosures mitigate the risk of transfer pricing reviews in the first instance.
The following transfer pricing ruling and PSLA’s were released on 17 December 2014: