International transfer pricing - introduction to concepts and risk assessment

This overview explains the basic concepts underlying international transfer pricing and when a business may face a transfer pricing review or audit. We recommend that you read this overview before reading the other guides listed in this document under What to read/do next .

When we refer to 'you' in this overview we are referring to you as a business with international dealings.

The overview does not replace, alter or affect in any way the ATO interpretation of the relevant law as discussed in various taxation rulings.

1. Introduction to concepts

The purpose of Australia's transfer pricing rules is to counter the underpayment of Australian tax by requiring businesses to price related party international dealings according to what truly independent parties acting independently would reasonably be expected to have done in the same situation.

Pricing for international dealings between related parties should reflect a fair return for the activities carried out in Australia, the Australian assets used (whether sold, lent or licensed), and the risks assumed in carrying out these activities.

Pricing that is not in accordance with Australia's transfer pricing rules is often referred to as 'international profit shifting'.

You should carefully consider the terms and conditions of any international dealings with related parties to ensure your business properly allocates income and expenses between Australia and other countries for tax purposes.

Methods of setting prices and reviewing the outcome of international transactions with related parties are recognised internationally using the arm's length principle, and Australia has adopted these in taxation rulings to help businesses understand what is expected of them. Refer to TR 98/11, TR 97/20 and TR 94/14.

Sections within 1. Introduction to concepts

Last Modified: Tuesday, 13 November 2012