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Schedule 25A instructions 2010

To help you complete a Schedule 25A for 1 July 2009 - 30 June 2010

Includes where to show foreign branch non-assessable, non-exempt income and lists new exemption and country codes for foreign locations.

About these instructions

Schedule 25A instructions 2010 will help you complete Schedule 25A 2010 (NAT 1125).

These instructions include information about:

related-party international dealings
permanent establishments
foreign branch non-assessable non-exempt income
country codes for foreign locations
pricing methods.

A worked example at appendix 5 shows how a hypothetical Australian resident company would complete the schedule.

When we refer to 'you', 'your business' or 'taxpayer' in these instructions, we are referring either to you as a business entity - for example, a company, trust, partnership or superannuation fund - that conducts a business, or to you as the tax agent or public officer responsible for completing the schedule.

This publication is not a guide to income tax law. Please get help from the ATO or a recognised tax adviser if you feel that this publication does not fully cover your circumstances.

Publications and services

To find out how to get a publication referred to in these instructions and for information about our other services, see More information.

Introduction

These instructions will help you complete Schedule 25A 2010.

If you answered yes on your partnership, trust, company or fund tax return to a question that asked if the aggregate amount of your transactions or dealings with international related parties was more than $1 million, complete section A of Schedule 25A and lodge it with the appropriate tax return. The aggregate amount of the dealings is the total amount of all dealings, whether on revenue or capital account, and includes the balance of any loans or borrowings outstanding with international related parties.

If you answered yes on your partnership, trust, company or fund tax return to a question about an overseas branch, an interest in a foreign company, a foreign trust, a foreign investment fund or a foreign life insurance policy, complete all questions in section B of Schedule 25A 2010 and lodge it with the appropriate tax return.

If you answered yes to both questions, complete sections A and B and lodge Schedule 25A 2010 with the appropriate tax return.

Answer the items in Schedule 25A 2010, including yes or no items, that apply to your particular circumstances. If an item or part of an item does not apply, leave it blank.

Related-party international dealings

Section A of Schedule 25A refers to related-party international dealings.

Complete section A if you answered yes to any of the following:

item 21 of the Company tax return 2010 (NAT 0656)
W item 29 of the Partnership tax return 2010 (NAT 0659)
W item 29 of the Trust tax return 2010 (NAT 0660)
B item 16 of the Fund income tax return 2010 (NAT 71287).

The ATO issues public rulings setting out its policies on taxation aspects of related-party international dealings. See More information.

It is recommended that taxpayers with related-party international dealings be familiar with these rulings. There are also a number of publications about international transfer pricing - visit our website for more information.

Also see the Organisation for Economic Co-operation and Development (OECD) Transfer pricing guidelines for multinational enterprises and tax administrations - 1995.

Definitions of some terms used in Schedule 25A are in appendix 2.

Permanent establishments

If you have a fixed place of business in Australia or overseas, other than a storage or display facility, or if you have a non-independent agent who contracts on your behalf, you may have a 'permanent establishment' in Australia or overseas.

If you do not know whether this is the case, refer to the appropriate international tax agreement for the comprehensive definition of a 'permanent establishment'.

The ATO adheres to a 'single entity' approach in its allocation of profits or income and expenditure in tax matters. That is, a permanent establishment is not to be regarded as a separate legal entity from your head office or other geographically separate business site. However, for the purposes of Schedule 25A, certain items (2a to 2d and 3a to 3b) should be answered on the notional basis that a permanent establishment is a separate but related entity.

Any allocation of profits or income and expenditure between the permanent establishment and the taxpayer's other business sites or activities must be established following the arm's length principle.

Examples

Examples, including suggested answers, for items 2 to 6 of Schedule 25A are provided at appendix 5.

Interests in foreign companies or foreign trusts

Section B of Schedule 25A refers to foreign branches of Australian companies, controlled foreign companies (CFCs), foreign investment funds (FIFs), foreign life insurance policies (FLPs) and controlled foreign trusts (CFTs), and is to be completed in all cases where the answer is yes to any of the following:

item 23 of the Company tax return 2010
S or T item 22 of the Partnership tax return 2010
S or T item 22 of the Trust tax return 2010
C item 16 of the Fund income tax return 2010.

If section B is to be completed, item 11, and items 13 to 17 (which are all Y for yes and N for no questions), must be answered in all cases. Leave other items blank if they do not apply.

Completing the schedule

Section A of schedule 25A 2010

Item 1

Item 1 asks for details and total values of the three main business activities carried out with international related parties, and the three principal foreign locations for each. If you had fewer than three business activities with related international parties, or any of those dealings in fewer than three locations, list only those that apply.

The industry codes to be used in this question are those listed in the Business industry codes 2010 (NAT 1827), available on our website.

The appropriate code is the code best describing the international business activities giving rise to or underlying the international dealings. It will not necessarily be the same as the code describing your general business activity or the types of transactions between the parties.

Where your business is divided into divisions, or business segments, which are reasonably in accordance with industry codes, these divisions may also be an appropriate basis for responding to this item.

You are not expected to conduct a detailed financial analysis to answer item 1. A reasonable degree of estimation is sufficient.

In the first column, at A, F and K write the appropriate industry codes that describe the three main business activities giving rise to, or underlying, the dealings carried out with international related parties. List these codes in descending order of total dollar value.

In the second column, at B, G and L write the value of the activities with international related parties for each of the industry codes. The value of the activities is the total for all locations for each underlying industry code. If part of the value of the activities is attributable to loans, this amount should not be included in the total value for each industry code.

Print the foreign location code - from appendix 1 - for the three principal foreign locations involved in each industry code. If there are fewer than three locations for any industry code, list only those that apply. List the location codes in descending order of dollar value.

Example 1

An Australian manufacturing and holding company has three subsidiaries, located in Thailand, Singapore and Indonesia. The following international business activities occurred during the year:

The Thai subsidiary manufactured household appliances that were purchased by the Australian parent company for wholesale distribution. The value of these purchases was $50,000.
The Singapore subsidiary manufactured electrical components for distribution in Australia and South-East Asia. During the year, the Australian parent company purchased finished components for re-sale. The parent company also carried out product design projects on behalf of this subsidiary. The value of the products purchased was $900,000, and the value of the design work carried out by the Australian parent company was $40,000.
Dealings that the Australian parent company had with the Indonesian subsidiary consisted only of a loan to that subsidiary and the receipt of interest on the loan. The value of the loan was $250,000 and $25,000 interest was received. The loan was to enable the Indonesian subsidiary to undertake market research in Indonesia.

Select the code for the Australian parent company's underlying international businesses as follows:

Thailand (location code THA): household appliance wholesaling - that is, purchase of finished goods from its subsidiary for wholesale distribution - industry code 34940
Singapore (location code SGP):

product design services - industry code 69230
purchase of finished goods from its subsidiary for resale - industry code 34940

Indonesia (location code IDN): the business activity giving rise to, or underlying, the loan was market research and the most appropriate industry code is market research service - industry code 69500.

The Australian parent company completes item 1 as follows:

A	34940	B	950,000	C	SGP	D	THA	E
F	69230	G	40,000	H	SGP	I		J
K	69500	L	25,000	M	IDN	N		O

The company writes the interest amount at L. The loan is not included in the total value for this industry code.

As there is no other market research activity with international related parties, the interest is the only amount written at this label.

Example 2

An Australian parent company has subsidiaries in New Zealand (location code NZL), Thailand (location code THA) and the United States of America (location code USA).

The company has three identifiable divisions:

chemical products manufacturing - industry code 18990. The related-party dealings by this division total $120,000 across all three locations
agricultural chemicals wholesaling - industry code 33230. The related-party dealings by this division total $200,000 across all three locations
mining and oilfield services - industry code 10900. The related-party dealings by this division total $700,000 across all three locations.

International transactions between the Australian parent and its foreign subsidiaries can be reasonably attributed to the divisions' business activities.

Use codes from the Business industry codes 2010 at A, F and K and the appropriate location codes from appendix 1.

A	10900	B	700,000	C	NZL	D	THA	E	USA
F	33230	G	200,000	H	USA	I	NZL	J	THA
K	18990	L	120,000	M	THA	N	NZL	O	USA

Example 3

An Australian company carries out a food manufacturing business - industry code 11990 - through a permanent establishment in New Zealand (location code NZL).

The company's head office in Australia carries out research in the Asia-Pacific markets for food and confectionery - industry code 69500. This information is used in its New Zealand business.

In the accounts a monthly charge of $200,000 is made by the head office to the New Zealand business for the marketing service. For this income year, the head office made 12 such monthly charges.

The company completes item 1 as follows:

A	69500	B	2,400,000	C	NZL	D	E
F		G		H		I	J
K		L		M		N	O

Item 2

The terms used in item 2 have their ordinary meanings within the context of Australian tax law and accounting practices. The particular terms related-party international dealings and international related parties used in these instructions are defined in appendix 2.

Include only dealings between international related parties, and not dealings between you and Australian resident entities. For example, if you received management fees from a foreign subsidiary but incurred costs in Australia to earn those fees, show only the gross management fees received from the foreign subsidiary.

Show only the gross amounts in columns A and B at this item, in whole dollars. Where, for example, a related-party international dealing involved payments by an Australian taxpayer to an international related party and also receipts from an international related party, show the payments at column A and the receipts at column B. Do not record the net amount of the transactions. An exception to this general approach applies in the case of certain derivative instruments. See Item 2d Other for more information.

For revenue transactions, unless otherwise specified, include those amounts that constitute assessable income or allowable deductions.

For capital transactions, include amounts that constitute acquisition and sale prices including any deemed acquisitions or disposals.

If you have a permanent establishment, record any transactions such as purchases or expenditure and sales or revenue at items 2a to 2d, as appropriate, on the notional basis that the permanent establishment is a separate entity.

These transactions include both revenue and capital - including deemed acquisitions and disposals.

Unless you are an authorised deposit-taking institution (ADI) within the meaning of section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997), or fall within the situation described in the next paragraph, do not include at items 2e or 2f any internal transfer of funds which are akin to the borrowing or lending of money (for example, from your head office or other business site to a permanent establishment, or vice versa) as such internal transfers of funds are not recognised under Australia's income tax laws.

Where, however, the internal transfer of funds reflects the internal allocation of funds you have borrowed from related or unrelated parties and the funds so borrowed are attributable to the permanent establishment, include at item 2d the interest and incidental costs of borrowing that are allocated to the permanent establishment by the head office and at item 2e include the amount borrowed from related or unrelated parties (see paragraphs 3.41 to 3.44 of Taxation Ruling TR 2001/11 - Income tax: international transfer pricing - operation of Australia's permanent establishment attribution rules).

Item 2a Tangible property

Show your gross purchases or expenditure for trading stock and raw materials from international related-party dealings at A Stock in trade and raw materials.

At B show the gross sales or revenue from trading stock and raw materials transactions with international related parties.

These amounts will typically be included in trading account items, and will include partially finished goods.

Show the gross purchases or expenditure at C All other tangible property and gross sales or revenue at D in respect of all tangible property other than:

trading stock and raw materials - include at item 2a
services - include at item 2c
other - list separately at item 2d.

Include acquisitions or disposals of ordinary shares or preference shares between international related parties at All other tangible property. Show the gross acquisition costs or receipts on disposal at C and D respectively.

Item 2b Royalties, rent and intangible property

Royalties are defined in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936). Show gross purchases or expenditure on royalties paid or payable to international related parties at E, and gross sales or revenue from royalties derived from international related parties at F.

Rent other than royalties includes gross expenditure and revenue for the use of, or the right to use, property, both tangible and intangible, not included as royalties. Show gross rent between international related parties at G and H.

Include gross purchases or expenditure and gross sales or revenue for all other intangible property - not in the nature of royalties or rent - at I and J respectively.

Item 2c Services

This part of item 2 is directed at the provision of services between international related parties. An inclusive definition of 'services' is provided at section 136AA(1) of the ITAA 1936.

Item 2c is divided into the various forms that the provision of services may take between international related parties.

Identify the nature of any services and group them if appropriate, recording purchases or expenditure on the types of services at K, M and O, and recording sales or revenue at L, N and P.

If you are unable to categorise the service as any of the specified types at item 2c, include the expenditure or revenue at Q and R.

Item 2d Other

This part of item 2 is directed at financial and similar dealings between international related parties, and all other dealings or transactions not specifically included at other labels.

The terms, as mentioned earlier, have their ordinary tax or accounting meanings. At A include any gross expenditure relating to interest or discounts, and at B include any gross revenue from interest and discounts. At C include any gross expenditure relating to insurance, such as premiums, and at D include any gross revenue from insurance dealings, including settlements, from international related-party dealings.

At E and F include any transactions between international related parties involving derivative instruments and any financial transactions other than loans. Definitions of these terms and how they should be recorded are provided below.

A derivative instrument is a contractual right that derives its value from the value of something else, such as a debt security, equity, commodity or a specific index. The most common derivative instruments are forwards, futures, options and notional principal contracts such as swaps, caps, floors, collars and credit derivatives. Unlike traditional debt and equity securities, these instruments do not involve a return on an initial investment.

For many derivative instruments such as notional principal contracts (for example, interest rate swaps), the parties to the contract will often only exchange net cash flows at certain specified times during the term of the contract. In completing Schedule 25A in respect of such derivative instruments, only net cash flows should be recorded at E if it is an outgoing and at F if it is a receipt. Do not record any gross cash flows or any notional principal amounts associated with such transactions.

In some cases, only one party to the derivative instrument transaction may make a payment (for example, settlement amounts in respect of forward rate agreements, or option premiums). In such cases, the gross amount of the derivative instrument transaction should be recorded at E if it is an outgoing and at F if it is a receipt.

Mark-to-market accounting may be used for recording amounts in respect of derivative instruments at this label where this is used by a taxpayer for financial accounting purposes.

A financial transaction other than a loan is any other form of financial transaction that is not a derivative instrument or an amount to be recorded elsewhere in item 2d (that is, interest, discounts or insurance) or at items 2e or 2f (that is, interest-bearing loans and interest-free loans) and that is of a revenue (that is, non-capital) nature. For example, payments or receipts in respect of guarantee arrangements, lease agreements, repurchase agreements, securities lending arrangements and so on should be recorded at this item.

Item 2e Loans - Interest bearing

This part of item 2 is concerned with identifying the gross amounts of loans and advances between international related parties for which an interest component is being charged.

The loans and advances to be shown here include all amounts borrowed between a taxpayer and the related parties.

The terms loans and advances are intended to be applied broadly in accordance with commercial and accounting practices (a rigorous application of the debt-equity test is not necessary).

Where you have borrowed amounts or received advances from an international related party or parties, add all the opening balances of these loans or advances and write the sum at G. Add all the closing balances for these loans and enter this amount at H.

Where you have loaned or advanced amounts to international related parties, add the opening balances of these loans and enter that total at I. Add the closing balances of the loans or advances and enter the total at J.

Example 4

An Australian company has several affiliates, which are related parties, in foreign countries. At the start of the income year, the company's balance sheet showed $182,678 owing to the affiliates by the company and $53,250 owing by the affiliates to the company.

At the end of the income year, $86,782 was owed to the affiliates by the company, and $245,354 was owed by the affiliates to the company. Item 2e would be completed as follows:

Opening Balance

Closing Balance

G	182,678	H	86,782
I	53,250	J	245,354

Item 2f Loans - Interest free

This part of item 2 is concerned with identifying the gross amounts of loans and advances between international related parties for which no interest component is being charged.

The loans and advances to be shown here include all amounts borrowed between a taxpayer and the related parties. The terms loans and advances are intended to be applied broadly, and to include quasi-equity loans in which no amount of interest was paid or accrued during the year.

The terms are not intended to include trade debtors and creditors who fall within ordinary commercial dealings. However, where trade debtors or creditors that are international related parties are allowed or give terms significantly more generous than those allowed to, or given by, comparable arm's length parties, those terms may constitute interest-free loans or advances. In completing this item, have regard to the terms of trade that are arm's length in your own particular circumstances.

Where you have borrowed amounts or received advances from an international related party or parties, add all the opening balances of these loans or advances and write the sum at K. Add all the closing balances for these loans and enter the total at L.

Where you have loaned or advanced amounts to international related parties, similarly add the opening balances of these loans and enter that total at M. Add the closing balances of the loans or advances and enter this at N.

Item 3a

This item asks whether any non-monetary consideration has been given or received in any dealings with related international parties.

These dealings may include providing services, transferring property (both tangible and intangible) or any similar dealings.

The nature of the dealing in which the non-monetary consideration is provided may be a barter, swap, bonus or discount, or any type of similar agreement.

Non-monetary consideration will generally include any consideration other than:

monetary payment
payment by cheque
telegraphic and bank-to-bank transfer of funds
inter-company loan account charges.

In particular, debt-for-equity swaps and non-monetary settlements of inter-company loan accounts will be taken to be non-monetary consideration.

Example 5

A taxpayer purchased trading stock for $20 million from an international related party.

If, rather than paying for the trading stock with a $20 million telegraphic funds transfer to the related party's loan account, the decision was made to settle the debt by any of the following:

forgiving royalties that would otherwise be payable by the international related party
transferring title in a fixed asset
agreeing to a discount on specified future transactions print Y for yes at B.

However, where individual debts between two parties are aggregated or netted and the net balance settled monetarily, this will not be considered to be non-monetary consideration.

As mentioned earlier, for the purposes of Schedule 25A, a permanent establishment is to be treated as a separate party from its head office or other related parties. Consequently, where non-monetary consideration passes between a permanent establishment and its head office in return for the provision of services or other transactions listed on Schedule 25A, print Y for yes at B item 3a.

Item 3b

This item asks whether you have made any provision of services, transfer of assets (both tangible and intangible) or any similar dealings with any related international party, for which you received no consideration.

Example 6

An Australian parent company manufactures trading stock that it sells to a foreign subsidiary for resale. The Australian parent develops a new product, which requires considerable training of the foreign subsidiary's staff in order to on-sell the new product.

The Australian parent provides this training, but does not charge the subsidiary. The Australian company should print Y for yes at C.

Similarly, the answer yes at C would also be required where an Australian company owned a trademark that it allowed an international related party to use without payment.

A permanent establishment should be regarded as a separate, but related, party to that of the head office for the purposes of this item.

Where there is no charge or adjustment allocating income or expenditure between the parties for a provision of services, transfer of property or other transactions listed on Schedule 25A by:

the head office to the permanent establishment, or
the permanent establishment to the head office or another related international party,

this will be regarded as being for nil consideration. Print Y for yes at C. Where you have disclosed an outbound interest-free loan at item 2f on Schedule 25A, the answer yes is not required at C.

Item 4

This item requires estimations of the percentages of the total dollar value of the related-party international dealings for which you have written documentation to support:

the characterisation of the international dealings in the context of your business, as described in step 1 of Taxation Ruling TR 98/11 - Income tax: documentation and practical issues associated with setting and reviewing transfer pricing in international dealings
the selection of the most appropriate arm's length pricing methods for those dealings, as described in step 2 of Taxation Ruling TR 98/11, and
the application of the most appropriate arm's length pricing methods to those dealings, as described in step 3 of Taxation Ruling TR 98/11.

The total related-party dealings to be included in this calculation are those dealings identified in items 2a to 2d. Do not include related-party dealings identified in items 2e or 2f.

The concept of 'the most appropriate method' is discussed in Taxation Ruling TR 97/20 - Income tax: arm's length transfer pricing methodologies for international dealings, at paragraphs 3.5 to 3.9.

Contemporaneous documentation

Documentation is contemporaneous if:

it is existing or brought into existence either

at the time you are developing or implementing any arrangement that might raise transfer pricing issues, or
when you are reviewing these arrangements prior to or at the time of the preparation of tax returns, and

the documentation records information relevant to transfer pricing decisions.

The documentation may be in the form of books, records, studies, budgets, plans and projections, analyses, conclusions and other material that record the information. It may be in electronic or written form.

The initial analysis of your international dealings against the arm's length principle will have been carried out and documented at the time of engaging in the dealings. To review those international dealings before you prepare your tax returns is prudent business practice.

Where you have not used arm's length consideration in the ordinary course of your related-party international dealings, review prices before preparing the tax return, and make any adjustments for taxation purposes. Keep all your documentation in relation to this.

Adequacy of documentation

The ATO does not expect taxpayers to prepare or obtain documents beyond the minimum needed to make a reasonable assessment of whether they have complied with the arm's length principle in setting prices or consideration.

However, the documentation that is created in the ordinary course of the taxpayer's business and used by it to establish the prices for its international related-party dealings - for example, invoices and orders - will not generally be regarded as contemporaneous documentation in relation to the arm's length nature of the dealings. This is because the documents do not produce any evidence or provide any basis for comparison for determining whether prices are established at arm's length.

It is not possible to provide a general checklist of documentation that would be adequate or desirable. The ATO realises that it is necessary to strike an acceptable balance between the need to keep compliance costs to a minimum and the legitimate concern of the ATO in ensuring the proper amount of Australian tax is paid.

The amount and type of documentation that should be created or obtained over and above that created in the ordinary course of business will depend on the facts and circumstances of each case.

The issue is a practical one having regard to what a prudent business person would do in the same circumstances, and taxpayers need to exercise commercial judgment in assessing their own compliance with the arm's length principle.

Arm's length pricing methods

The arm's length principle is the statutory test for pricing related-party international dealings. The principle is incorporated into the associated enterprise articles in each of Australia's double tax agreements.

No particular method to establish the arm's length pricing, or order in which methods should be applied, is prescribed in the double tax agreements or related legislation, and taxpayers have the greatest scope to use methods appropriate to their circumstances.

Taxation Ruling TR 97/20 sets out:

the methods acceptable to the ATO
when these methods are considered acceptable
our views on the concepts involved, and the issues that arise, in applying the methods.

We strongly recommend that all taxpayers with international related-party dealings read this ruling.

Further information is in Taxation Ruling TR 94/14 - Income tax: application of Division 13 of Part III (international profit shifting) - some basic concepts underlying the operation of Division 13 and some circumstances in which section 136AD will be applied, paragraphs 86 and 343, and also in the OECD's report Transfer pricing guidelines for multinational enterprises and tax administrations - 1995.

A brief overview of some methods is at item 5 column A. However, for detailed information about the different methods, see the references above.

Permanent establishments

Where the international dealings are conducted between a permanent establishment and its head office, or between related permanent establishments, the prices adopted for those dealings, for tax purposes, should be determined under the arm's length principle where the prices form the basis for the allocation of profits of the taxpayer in and out of Australia.

Capital dealings

Where the dealings between related parties are capital in nature, the methods discussed at item 5 column A may not be appropriate.

Some alternative suggestions are given at item 6b, and these may be appropriate under certain circumstances. However, no specific methods are recommended.

For the purpose of answering items 4a and 4b, include capital dealings where written documentation is held to support the choice of method for the processes involved in steps 1, 2 and 3 of Taxation Ruling TR 98/11, and a bona fide belief is held that the resulting transfer pricing is arm's length.

Choice of method to determine arm's length pricing

The characterisation of the dealings and the selection and application of the appropriate method are three steps in a four-step process for establishing arm's length transfer prices between associated enterprises. The fourth step is to provide processes for review and adjustment, if necessary, to the chosen method.

The four steps, briefly, are:

understanding the cross-border dealings in the context of the taxpayer's business - that is, characterisation of the dealings
selecting the most appropriate method or methods
applying that method
establishing review and adjustment processes.

The first two steps may be complex processes and you may need to refer to specific details provided in Taxation Ruling TR 98/11.

The ATO considers that the prudent taxpayer will document:

the processes of characterisation and selection
the reasons for the final choice of method
the reasons why other methods were considered and rejected.

As mentioned earlier, the ATO requires that adequate documentation be kept. However, the complexity of the dealings will indicate the extent to which analysis and supporting documentation is required.

Application of pricing methods

The application of the chosen method will usually require two separate processes:

an assessment of comparability
the collection of supplementary data.

The first process will include:

searching for comparable transactions or enterprises
identifying sources of information used in the search
adopting transactions or enterprises as being comparable
rejecting other transactions or enterprises as not being comparable
providing reasons and amounts where an independent transaction has been adjusted to make it comparable with the dealings under examination
applying the pricing method, and any checking method - such as sampling - to ensure the validity of the chosen method and resultant arm's length price.

The second process will include:

collecting data on profit projections
creating or acquiring records to supplement the analysis of comparability and function
collecting data to calculate financial performance ratios, as part of applying the chosen pricing methods.

You must prepare and retain relevant documentation about these processes.

Item 4a

Use one of the following numeric codes to state the percentage of the total dollar value of related-party international dealings identified in items 2a to 2d only, for which you have written documentation supporting your processes in steps 1 and 2 (characterisation and selection) of chapter 5 of Taxation Ruling TR 98/11. Print the code at F.

Percentage of dollar value of related-party dealings - items 2a to 2d only

Percentage	Code
0%	1
1% to less than 25%	2
25% to less than 50%	3
50% to less than 75%	4
75% to less than 100%	5
100%	6

Note that the calculations need only be sufficient to allow the percentage range to be estimated or determined. However, this estimating process must be based on rational and objective premises.

A statistical sample may be an appropriate method of calculating the relevant percentage, provided the sample selection and mathematical considerations are consistent with generally accepted statistical methods.

Keep your working papers if you have used a sampling process to make this estimate.

Item 4b

Use one of the codes shown in item 4a to state the percentage of the total dollar value of related-party international dealings identified in items 2a to 2d only, for which you have written documentation supporting your processes in step 3 of chapter 5 of Taxation Ruling TR 98/11. Print the code at G.

As in the instructions for item 4a, you need only estimate the percentage, provided the estimate is objectively and rationally determined. Use, for example, a sampling technique based on accepted statistical methods. Keep your working papers that relate to item 4b.

Item 5 Column A

In column A list the four principal methods that you used in establishing or reviewing the appropriate arm's length pricing or consideration in your related-party international dealings that are revenue in nature, and were identified in items 2a to 2d. Related-party dealings of a capital nature are addressed in item 6.

Not all the methods are generally considered to provide an arm's length outcome, but may be arm's length in some cases.

If you did not use any methods, leave item 5 blank. If you used fewer than four, list only those used.

Record the four methods at H to N in descending order of total dollar value, using the appropriate code from the following table:

Pricing method	Code
Comparable uncontrolled price (CUP) method	1
Resale price method	2
Cost-plus method	3
Profit split method	4
Transactional net margin method	5
Marginal costing	6
Cost-contribution arrangement	7
Apportionment of costs	8
Apportionment of income	9
Fixed mark-up applied to cost	10
Fixed percentage of resale price	11
Other arm's length methods	12

The above methods are explained in detail in Taxation Ruling TR 97/20 and Taxation Ruling TR 1999/1 - Income tax: international transfer pricing for intra-group services, and it is strongly recommended that taxpayers with related-party dealings read these rulings before completing item 5. The rulings generally accept the principles in the OECD report Transfer pricing guidelines for multinational enterprises and tax administrations - 1995. However, any differences are clearly indicated.

A brief summary of each of the methods in the above table is provided in appendix 4. The list is not intended to be exhaustive, nor will each method be acceptable under all circumstances.

As in item 4, in order to establish appropriate arm's length pricing under a particular method, a sampling of the dealings may be sufficient if carried out according to accepted statistical practice. Note that where total dollar value of related-party dealings is to be calculated, these dealings should not be 'netted off' (other than in the case of certain derivative instruments - see Item 2d Other for further details). That is, do not set off incomings and outgoings against each other to result in a lesser amount. Instead, add the amounts, both income derived and expenses incurred, to obtain the sum total of all such dealings.

Item 5 Column B

In column B at I to O indicate, against each method identified in column A, the total dollar value of related-party dealings to which you applied that method. Express them as a percentage of the sum of all the related-party dealings for which you used methods to establish arm's length pricing.

Indicate this percentage by using the appropriate code from the following table

Percentage of dollar value of related-party dealings that are revenue in nature - items 2a to 2d only

Percentage	Code
0%	1
1% to less than 25%	2
25% to less than 50%	3
50% to less than 75%	4
75% to less than 100%	5
100%	6

The amount referred to above as the total dollar value of related-party dealings is, as in the calculation of the value of dealings in column A, the sum total of such dealings, both income derived and expenses incurred. Do not offset these amounts against each other.

The percentage required is an approximate percentage, and an estimate is acceptable provided it is based on objective premises.

A statistical sampling is an acceptable method, provided the method follows accepted statistical practice. Keep any working papers relating to this process.

Item 6

This question is concerned with any dealings of a capital nature that have occurred between you and an international related party. These capital dealings are those that you would have included at items 2a to 2d, but not those dealings which concern trading stock in the ordinary course of business.

If you print N for no at item 6a, disregard items 6b and 6c and go to item 7.

Item 6a

This question requires either Y for yes or N for no. You should answer yes if you have acquired an interest in an asset as a result of dealings of a non-revenue (capital) nature with international related parties, or if you have had dealings with an international related party that would be classified as a capital gains tax (CGT) event in terms of Part 3-1 of the ITAA 1997.

The words 'acquired', 'CGT event', 'disposal' and 'asset' are used in this item in the context of Part 3-1 of the ITAA 1997. The question does not refer to trading stock held in the ordinary course of business.

Item 6b

Where you have acquired capital assets from, or have disposed of capital assets to, international related parties, use the codes below to indicate the four principal methods you used for pricing those acquisitions or disposals. Record the methods you used by placing the appropriate codes in each space at Q in descending order of total dollar value, starting at the left-hand side.

If you used fewer than four methods leave the remaining spaces blank.

Pricing method	Code
Nil consideration	1
Cost price	2
Written-down value	3
Discounted cash flow	4
Director's valuation	5
Independent valuation	6
Quoted market price	7
Other methods	8

Cost price refers to the price the seller originally paid for the asset, including ancillary costs such as freight or handling.

Written-down value refers to a pricing method based on either the taxation 'adjustable value' or accounting residual value after depreciation has been allowed.

Discounted cash flow is a pricing method where the price of an asset is based on the discounted cash flow at the time of acquisition or disposal.

Director's valuation refers to a pricing method that is based on the directors' opinion of an asset's value, and not on any of the other methods listed in codes 1 to 8.

Independent valuation is a pricing method by which a suitably qualified person, acting at arm's length to both the buyer and seller, assesses the value of an asset.

Quoted market price refers to a price quoted on a public listed market, such as a public stock exchange, or commodities market.

Other methods means any other pricing method that is not mentioned in item 6.

The above pricing methods may not provide an arm's length price under all circumstances. The above examples are not an exhaustive list and the appropriate choice of method must be based on the particular circumstances of the dealings.

Item 6c

This item requires you to identify the percentage of your related-party international dealings that are capital in nature.

Use the codes in the table below to show the total international related-party acquisitions and disposals of capital assets as a percentage of the total value of related-party international dealings of both a revenue and non-revenue (or capital) nature. Print the code at R.

Total of related-party acquisitions and disposals of capital assets as a percentage of the total of related-party dealings - items 2a to 2d only

Percentage	Code
0%	1
1% to less than 25%	2
25% to less than 50%	3
50% to less than 75%	4
75% to less than 100%	5
100%	6

As in the instructions for item 4, you only need to estimate the percentage, provided the estimate is objectively and rationally determined using, for example, a sampling technique based on accepted statistical methods. Keep your working papers that relate to item 6c.

Item 7

In this item you are asked to advise whether any non-resident has participated in the capital, management or control of the company in this year. 'Participating in the capital' means having an equity interest of 10% or greater in the company. Print Y for yes or N for no at S.

Item 8

In this item you are asked to show the number of international related parties with which you had dealings during the year. 'International related parties' are parties (including subsidiaries and permanent establishments) whose international dealings can be subject to Division 13 of the ITAA 1936. An expanded definition is in appendix 2.

Section B of schedule 25A 2010

item 23 of the Company tax return 2010
S or T item 22 of the Partnership tax return 2010
S or T item 22 of the Trust tax return 2010
C item 16 of the Fund income tax return 2010.

If section B is required, item 11, and items 13 to 17 (which are all Y for yes and N for no questions), must be answered in all cases. Leave other items blank if they do not apply.

For the purposes of section B:

'listed countries' are countries listed in Part 1 of Schedule 10 of the Income Tax Regulations 1936 (ITR 1936)
'section 404 countries' are countries listed in Part 2 of Schedule 10 of the ITR 1936
an 'unlisted country' is a country that is not shown in Schedule 10 of the ITR 1936.

Item 9

This item asks for details of the number of CFCs and CFTs in which the entity had either a direct or indirect interest at the start and end of the accounting period. Separate information is required for listed country, section 404 country and unlisted country CFCs and CFTs. Determine whether the CFCs and CFTs are residents of listed countries, section 404 countries or unlisted countries.

A listed country trust estate is defined in section 102AAE of the ITAA 1936. The terms 'direct control interest' and 'indirect control interest' in a CFC and CFT have the same meaning as in Division 3 of Part X of the ITAA 1936.

Labels A, B and C

Show the total number of listed country, section 404 country and unlisted country CFCs and CFTs at the start of the entity's accounting period.

Labels D, E and F

Show the total number of listed country, section 404 country and unlisted country CFCs and CFTs at the end of the entity's accounting period.

If the number of CFCs and CFTs is less than 10, write 0 (zero) as the first digit. If the number of CFCs and CFTs is more than 99, write 99. If the number of CFCs and CFTs is zero, leave the relevant answer block blank.

Example 7

If an entity had five listed country CFCs at the start of the year and nil at the end of the year, and no unlisted country CFCs at either the year's start or end, write 05 at A. Leave all other labels at item 9 blank.

Item 10

This item asks for details of attributable income that is assessable under sections 456, 457 or 459A of the ITAA 1936. Show the total amount assessable under each of these sections at the appropriate labels. Use whole dollars. Leave labels blank if they do not apply.

Item 11

This item asks for the amount of foreign income that is non-assessable non-exempt income under sections 23AH, 23AI, 23AJ or 23AK of the ITAA 1936. Non-assessable non-exempt income is a category of income now recognised by the income tax law. Non-assessable non-exempt income is not taken into account in working out a taxpayer's taxable income for an income year. Also, it is not taken into account in working out a taxpayer's tax loss for an income year or in working out how much of a prior year tax loss is deductible in an income year.

Write the total amounts in whole dollars for listed countries, section 404 countries and unlisted countries that are non-assessable non-exempt income under each of the sections 23AH, 23AI, and 23AJ at O to V as appropriate.

For amounts that are non-assessable non-exempt income under section 23AK, write the total amount at W. If there is no non-assessable non-exempt income for some sections, leave those labels blank.

Item 12

This item concerns the reduction in a capital gain or capital loss where Subdivision 768-G of the ITAA 1997 applies. If a company held a voting interest of at least 10% in a foreign company and held that interest for a continuous period of at least 12 months in the two years before the specified CGT event it may be entitled to use this measure. If this measure applies, the relevant item(s) at 12a or 12b must be completed. If a capital gain was reduced in accordance with Subdivision 768-G write the amount of the reduction at item 12a. If a capital loss is reduced in accordance with Subdivision 768-G write the amount of the capital loss that may be utilised or carried forward at item 12b.

Item 13

This item asks whether transfers of accumulated profits, accumulated losses, paid-up capital or other assets or reserves were made from any unlisted country CFC or CFT to a related entity in a listed country during the year of income.

Transfer includes sale, acquisition, gift, deed of assignment, declaration of trust or otherwise, with or without consideration - monetary or non-monetary.

Examples of the type of transfers to include are:

the disposal of an asset to a related entity in a listed country, other than trading stock disposed of in the normal course of business
the waiving of a debt owed by a related entity in a listed country
the making of a loan to a related entity in a listed country
the acquisition of a share, a right to acquire a share, or an option to acquire a share in a related entity in a listed country
the making of a payment in respect of a call on a share in a related entity in a listed country.

Print either Y for yes or N for no at each of S, T, U and V.

Items 14 to 19

Unless otherwise specified, the terms used in items 14 to 19 have the same meaning as set out in Divisions 6 and 6AAA of the ITAA 1936.

Item 14

This item asks whether a transfer of property or services has ever been made or caused to be made to a non-resident trust estate. The item is not restricted to the income year of this tax return.

'Transfer', 'property' and 'services' are defined in section 102AAB of the ITAA 1936. Sections 102AAJ and 102AAK of the ITAA 1936 provide guidance in relation to whether there was a transfer or a deemed transfer of property or services to a non-resident trust estate. You must print either Y for yes or N for no at W.

Item 15

This item asks whether the entity was a beneficiary of a non-resident trust estate at any time during the year of income. You must print either Y for yes or N for no at X.

Item 16

This item asks whether the entity had an interest in a non-resident trust estate, or was entitled to acquire an interest in a non-resident trust estate, at any time during the income year.

'Entitled to acquire' has the same meaning as set out in section 322 of Part X of the ITAA 1936. You must print either Y for yes or N for no at Y.

Item 17

This item asks whether any of the non-resident trust estates for which a yes answer was given at items 14, 15 or 16 is a discretionary trust estate. Discretionary trust estate is defined in section 102AAB of the ITAA 1936. If you answered yes at W, X or Y, print either Y for yes or N for no, as applicable, at Z. If you answered no at all of W, X and Y, leave Z blank.

Item 18

This item asks whether the entity was able to control a non-resident trust estate at any time during the income year. Control in relation to a trust estate is defined in section 102AAG of the ITAA 1936. Print either Y for yes or N for no at A.

Item 19

This item asks for the current value, at the end of the notional accounting period, of interests in FIFs and FLPs that are exempt under the specified sections of Part XI of the ITAA 1936.

The value should be the most accurate current value that is available or, if no current value is available, use cost. FIF is defined in section 481 of the ITAA 1936. FLP is defined in section 482 of the ITAA 1936. Interest in a FIF or FLP is defined in section 483 of the ITAA 1936.

'Notional accounting period' in respect of a FIF is defined in section 486 of the ITAA 1936.

'Notional accounting period' in respect of an FLP is defined in section 487 of the ITAA 1936.

Write the relevant code from the list below for the interests that qualify for exemptions at B to T. Write the value of the corresponding interest in whole dollars at C to U.

Show only the principal 10 in descending order of total dollar value. If there were more than 10 exemptions, show the largest 10 based on dollar values. If there were fewer than 10 exemptions, leave the remaining answer blocks blank.

Section		Code
497	Interests in a foreign company principally engaged in eligible company activities	01
503	Interests in a foreign bank	02
504	Interests in a foreign holding company of a foreign bank	03
506	Interests in a foreign life insurance company	04
507A	Interests in a foreign holding company of a foreign life insurance company	05
509	Interests in a foreign general insurance company	06
509A	Interests in a foreign holding company of a foreign general insurance company	07
511	Interests in a foreign company engaged in certain activities connected with real property	08
511A	Interests in a foreign holding company of a foreign real property company	09
513	Interests in certain USA entities	10
515	Interests of less than $50,000	11
519B	Exemption for complying superannuation entities, certain assets of life insurance companies and certain fixed trusts	12
521	Interests that are trading stock	13
523	Interests in a foreign company principally engaged in several of certain activities	14
523A	Interests in a foreign holding company of a foreign mixed activity company	15
525	Interests not exceeding 10% of the value of all FIF interests	16
527	Certain interests of underwriting members of Lloyd's	17

Example 8

Example 8

Appendices

Appendix 1 Location names and codes

The following table lists the location names and codes to be used in completing item 1.

Country/Jurisdiction	Code
Afghanistan	AFG
Åland Islands	ALA
Albania	ALB
Algeria	DZA
American Samoa	ASM
Andorra	AND
Angola	AGO
Anguilla	AIA
Antarctica	ATA
Antigua and Barbuda	ATG
Argentina	ARG
Armenia	ARM
Aruba	ABW
Austria	AUT
Azerbaijan	AZE
Bahamas	BHS
Bahrain	BHR
Bangladesh	BGD
Barbados	BRB
Belarus	BLR
Belgium	BEL
Belize	BLZ
Benin	BEN
Bermuda	BMU
Bhutan	BTN
Bolivia	BOL
Bosnia and Herzegovina	BIH
Botswana	BWA
Bouvet Island	BVT
Brazil	BRA
British Indian Ocean Territory	IOT
British Virgin Islands	VGB
Brunei Darussalam	BRN
Bulgaria	BGR
Burkina Faso	BFA
Burundi	BDI
Cambodia	KHM
Cameroon	CMR
Canada	CAN
Cape Verde	CPV
Cayman Islands	CYM
Central African Republic	CAF
Chad	TCD
Chile	CHL
China	CHN
Christmas Island	CXR
Cocos (Keeling) Islands	CCK
Colombia	COL
Comoros	COM
Congo, Democratic Republic of (was Zaire)	COD
Congo, People's Republic of	COG
Cook Islands	COK
Costa Rica	CRI
Côte D'Ivoire (Ivory Coast)	CIV
Croatia (Hrvatska)	HRV
Cuba	CUB
Cyprus	CYP
Czech Republic	CZE
Denmark	DNK
Djibouti	DJI
Dominica	DMA
Dominican Republic	DOM
East Timor (Timor-Leste)	TLS
Ecuador	ECU
Egypt	EGY
El Salvador	SLV
Equatorial Guinea	GNQ
Eritrea	ERI
Estonia	EST
Ethiopia	ETH
Falkland Islands (Malvinas)	FLK
Faroe Islands	FRO
Fiji	FJI
Finland	FIN
France	FRA
French Guiana	GUF
French Polynesia	PYF
French Southern Territories	ATF
Gabon	GAB
Gambia	GMB
Georgia	GEO
Germany	DEU
Ghana	GHA
Gibraltar	GIB
Greece	GRC
Greenland	GRL
Grenada	GRD
Guadeloupe	GLP
Guam	GUM
Guatemala	GTM
Guernsey	GGY
Guinea	GIN
Guinea-Bissau	GNB
Guyana	GUY
Haiti	HTI
Heard and McDonald Islands	HMD
Holy See (Vatican City State)	VAT
Honduras	HND
Hong Kong	HKG
Hrvatska (Croatia)	HRV
Hungary	HUN
Iceland	ISL
India	IND
Indonesia	IDN
Iran	IRN
Iraq	IRQ
Ireland	IRL
Isle of Man, The	IMN
Israel	ISR
Italy	ITA
Ivory Coast (Côte D'Ivoire)	CIV
Jamaica	JAM
Japan	JPN
Jersey	JEY
Jordan	JOR
Kazakhstan	KAZ
Kenya	KEN
Kiribati	KIR
Korea, Democratic People's Republic of (North Korea)	PRK
Korea, Republic of (South Korea)	KOR
Kuwait	KWT
Kyrgyzstan	KGZ
Laos	LAO
Latvia	LVA
Lebanon	LBN
Lesotho	LSO
Liberia	LBR
Libya	LBY
Liechtenstein	LIE
Lithuania	LTU
Luxembourg	LUX
Macau	MAC
Macedonia, The Former Yugoslav Republic of	MKD
Madagascar	MDG
Malawi	MWI
Malaysia	MYS
Maldives	MDV
Mali	MLI
Malta	MLT
Marshall Islands	MHL
Martinique	MTQ
Mauritania	MRT
Mauritius	MUS
Mayotte	MYT
Mexico	MEX
Micronesia, Federated States of	FSM
Moldova	MDA
Monaco	MCO
Mongolia	MNG
Montenegro	MNE
Montserrat	MSR
Morocco	MAR
Mozambique	MOZ
Myanmar (was Burma)	MMR
Namibia	NAM
Nauru	NRU
Nepal	NPL
Netherlands, The	NLD
Netherlands Antilles	ANT
New Caledonia	NCL
New Zealand	NZL
Nicaragua	NIC
Niger	NER
Nigeria	NGA
Niue	NIU
Norfolk Island	NFK
Northern Mariana Islands	MNP
North Korea	PRK
Norway	NOR
Oman	OMN
Pakistan	PAK
Palau	PLW
Palestinian Territory, Occupied	PSE
Panama	PAN
Papua New Guinea	PNG
Paraguay	PRY
Peru	PER
Philippines	PHL
Pitcairn Island	PCN
Poland	POL
Portugal	PRT
Puerto Rico	PRI
Qatar	QAT
Réunion	REU
Romania	ROU
Russian Federation	RUS
Rwanda	RWA
Saint Barthélemy	BLM
Saint Helena	SHN
Saint Kitts and Nevis	KNA
Saint Lucia	LCA
Saint Martin (French part)	MAF
Saint Pierre and Miquelon	SPM
Saint Vincent and The Grenadines	VCT
Samoa	WSM
San Marino	SMR
Sao Tome and Principe	STP
Saudi Arabia	SAU
Senegal	SEN
Serbia	SRB
Seychelles	SYC
Sierra Leone	SLE
Singapore	SGP
Slovakia (Slovak Republic)	SVK
Slovenia	SVN
Solomon Islands	SLB
Somalia	SOM
South Africa	ZAF
South Georgia and the South Sandwich Islands	SGS
South Korea	KOR
Spain	ESP
Sri Lanka	LKA
Sudan	SDN
Suriname	SUR
Svalbard and Jan Mayen Islands	SJM
Swaziland	SWZ
Sweden	SWE
Switzerland	CHE
Syria	SYR
Taiwan	TWN
Tajikistan	TJK
Tanzania	TZA
Thailand	THA
Timor-Leste (East Timor)	TLS
Togo	TGO
Tokelau	TKL
Tonga	TON
Trinidad and Tobago	TTO
Tunisia	TUN
Turkey	TUR
Turkmenistan	TKM
Turks and Caicos Islands	TCA
Tuvalu	TUV
Uganda	UGA
Ukraine	UKR
United Arab Emirates	ARE
United Kingdom	GBR
United States	USA
United States Minor Outlying Islands	UMI
United States Virgin Islands	VIR
Uruguay	URY
Uzbekistan	UZB
Vanuatu	VUT
Vatican City State (Holy See)	VAT
Venezuela	VEN
Vietnam	VNM
Wallis and Futuna Islands	WLF
Western Sahara	ESH
Yemen	YEM
Zambia	ZMB
Zimbabwe	ZWE

Appendix 2 Definitions

Capital means an equity interest of 10% or greater.

International related parties means persons, including permanent establishments, who are parties to international dealings that can be subject to Division 13 Part III of the ITAA 1936 and/or the business profits article or associated enterprises article of a relevant double tax agreement. The term includes the following:

any overseas entity or person who participates directly or indirectly in your management, control or capital
any overseas entity or person in respect of which you participate directly or indirectly in the management, control or capital
any overseas entity or person in respect of which persons who participate directly or indirectly in its management, control or capital are the same persons who participate directly or indirectly in your management, control or capital
a permanent establishment and its head office
two permanent establishments of the same entity or person.

Participate(s) includes a right of participation, the exercise of which is contingent on an agreed event occurring.

Person has the same meaning as in subsection 6(1) of the ITAA 1936 and section 995-1 of the ITAA 1997.

Related-party international dealings means international transactions, agreements or arrangements between related parties, between a permanent establishment and its head office or between two permanent establishments of the same entity or person. The term includes all transactions between an Australian resident and international related parties.

Appendix 3 Abbreviations

ADI	authorised deposit-taking institution
CGT	capital gains tax
CFC	controlled foreign company
CFT	controlled foreign trust
CUP	comparable uncontrolled price
FIF	foreign investment fund
FLP	foreign life insurance policy
ITAA 1936	Income Tax Assessment Act 1936
ITAA 1997	Income Tax Assessment Act 1997
ITR 1936	Income Tax Regulations 1936
PE	permanent establishment
R&D	research and development

Appendix 4 Pricing methods

See Taxation Ruling TR 97/20 and Taxation Ruling TR 1999/1 for a more complete explanation of the operation and suitability of each of the methods mentioned below for particular circumstances.

The explanations below are only brief summaries of each method, and the list is not exhaustive. The methods may not be appropriate for determining an arm's length price under all circumstances. Other methods, which are not listed below, might also be appropriate.

It is not possible to identify all the circumstances under which the various methods will produce valid results, and the applicability of any particular method for any given transaction must be determined from all the facts and circumstances of the dealing.

Comparable uncontrolled price method - code 1

This method compares the price for property or services transferred in a controlled transaction - that is, with a related international party - to the price that is charged for comparable property or services in an uncontrolled transaction, under similar circumstances.

If you use this method but the comparable uncontrolled price (CUP) is adjusted to allow for particular circumstances of the controlled dealing, you should still record the adjusted price under this code.

Resale price method - code 2

This pricing method may be appropriate where an enterprise sells a product to a related party, who then re-sells that product to an independent third party.

The resale price is reduced by the arm's length resale price margin, and may then be regarded - after adjustments for other costs associated with the original purchase of the product - as an arm's length price of the original transfer of property between the related parties.

Cost-plus method - code 3

The cost-plus method begins with the costs incurred by the supplier of property or services in a controlled transaction for property transferred or services provided to a related purchaser. An appropriate arm's length cost-plus mark-up is then added to this cost, to make an appropriate profit in light of the functions performed, assets used and the market conditions. What is arrived at after adding the arm's length cost-plus mark-up to the above costs may be regarded as an arm's length price of the original controlled transaction.

This method is probably most useful if:

semi-finished goods are sold between related parties
related parties have concluded joint facility agreements or long-term buy-and-supply arrangements, or
the controlled transaction is the provision of services.

If a fixed percentage mark-up is applied to the relevant cost base without any benchmarking of that percentage against comparable independent dealings, this will not be regarded as cost-plus method.

Profit split method - code 4

This is a method of determining the appropriate pricing for transactions by:

identifying the combined profit or loss from the dealings between the related parties, and
splitting that combined profit or loss between the related parties.

The split of profit or loss between the parties must be made on an economically valid basis that approximates the division of profits that would have been arrived at in an agreement made at arm's length.

Transactional net margin method - code 5

This pricing method is based on comparisons made at the net profit level between the taxpayer and independent parties, in relation to a comparable transaction or dealing.

Comparisons at the net profit level can be made on a single transaction or in relation to some aggregation of dealings between associated enterprises.

Marginal costing - code 6

Marginal costing is a method of pricing that applies only the variable production costs to the costs of a product. Marginal costing is often used by companies and multinational enterprise groups for internal cost accounting and management control purposes. However, its use in setting transfer prices on international dealings between associated enterprises for tax purposes is acceptable only if pricing on the basis of marginal costs represents an arm's length outcome for the transfer of goods or services into the particular market.

Cost-contribution arrangement - code 7

A cost-contribution arrangement is one where members of a multinational group act in concert for the benefit of each of the participants to:

produce or provide goods, intangible property or services, or
acquire these jointly from a third party,

and agree to share the actual costs and risks undertaken.

Each participant bears a fair share of the costs, and is entitled to receive a fair share of rewards. The concept is akin to a joint venture or partnership.

To be consistent with the arm's length principle, the contributors must be satisfied that they can obtain an acceptable rate of return within a timeframe that takes into account their financial and business circumstances.

For more information refer to Taxation Ruling TR 2004/1 - Income tax: international transfer pricing - cost contribution arrangements.

Apportionment of costs - code 8

This pricing method apportions the costs associated with a controlled transaction among the associated enterprises. An answer must be found to all transfer pricing problems. However, cases may arise where neither comparable dealings nor data are available to apply to traditional, or profit-based, methods. In these instances, application of an indirect method such as apportionment of costs on the basis of a formula may be applicable.

Apportionment of income - code 9

This pricing method apportions the income associated with a controlled transaction among the associated enterprises.

As with the method for code 8, this method may be applicable where there are neither comparable dealings nor data to apply the traditional, or profit-based, methods to the pricing problem.

Fixed percentage mark-up applied to costs - code 10

This pricing method determines the transfer price for a controlled transaction by applying a fixed percentage mark-up to a relevant cost base, where the mark-up is not benchmarked against comparable independent dealings. The absence of benchmarking distinguishes this method from the cost-plus method discussed at code 3.

Fixed percentage of resale price - code 11

This pricing method determines the transfer price for a controlled transaction as a fixed percentage of the resale price, where the fixed percentage chosen is not benchmarked against the gross margins earned in comparable independent dealings.

The absence of benchmarking distinguishes this method from the resale price method, code 2.

Other arm's length methods - code 12

Any arm's length method which is not included at codes 1 to 11.

Appendix 5 Worked example

The following example shows how the appropriate answers are determined for Schedule 25A for a hypothetical situation involving an Australian resident company.

Example 9

The Australian company, XYZ Pty Ltd, has its head office in Australia and is a parent company to several wholly owned subsidiaries overseas. XYZ Pty Ltd also has a permanent establishment in Hong Kong.

Subsidiaries and permanent establishments qualify as international related parties - see the definition in Appendix 2.

During the year ending 30 June 2010, XYZ Pty Ltd had related-party dealings with its international related parties, the subsidiaries and the permanent establishment. These dealings included both capital and revenue transactions. Some of the dealings were transacted at arm's length prices, ensured by implementing and following various arm's length pricing methods, while other dealings were not.

The following related-party dealings, shown in Australian dollars, occurred during the year and are grouped under the headings in item 2 of the schedule.

Stock in trade and raw materials

Stock in trade was sold to subsidiaries for $146,450. All sales were priced at bona fide arm's length prices, of which 50% were based on CUP and 50% based on the cost-plus method.

For the CUP dealings, the method for pricing was selected, applied and documented as discussed in the introduction to item 4.
For the cost-plus dealings, the pricing method was selected and documented for all the dealings, but written documentation on the application of the method was kept for only one-quarter of all these dealings.

Raw materials were purchased from subsidiaries for $178,750. Of this total dollar amount, 60% was priced on comparative uncontrolled prices, and the remaining 40% was invoiced at a price XYZ Pty Ltd considered reasonable.

For all CUP dealings, the method was selected, applied and documented as discussed in the introduction to item 4.

Stock in trade was transferred to the Hong Kong permanent establishment which then on-sold to third parties in Hong Kong.

XYZ Pty Ltd's internal transfer price for the stock transferred from Australia to Hong Kong was $60,000.
The arm's length transfer price for the stock was $70,000.
For taxation purposes, XYZ Pty Ltd selected, applied and documented a bona fide CUP. The arm's length price was reflected in the taxable income by an adjustment at item 7 Reconciliation to taxable income or loss on XYZ Pty Ltd's tax return.

Raw materials were transferred from the permanent establishment at an internal company invoice price of $45,000.

No adjustment was considered or made to taxable income.

Other tangible property

Shares in a listed company were sold to a subsidiary for $23,345, being the quoted share price at the time. This method was selected, applied and documented as discussed in the introduction to the notes to item 4.
Machinery was purchased by a subsidiary and transferred to XYZ Pty Ltd for $18,850.

This was the actual price paid by the subsidiary, including handling charges. This method was also selected, applied and documented as discussed in the notes to item 4.

Royalties

The subsidiaries used trademarks owned by XYZ Pty Ltd but did not pay royalties.

Other intangible property

XYZ Pty Ltd sold a trademark to a subsidiary. This was a 'once-only' occurrence and was invoiced at cost plus a nominal mark-up. The amount invoiced was $17,800.

Management and marketing fees

XYZ Pty Ltd performed management services for its subsidiaries, and charged them cost plus 5%.

The amount invoiced was $16,000.

For taxation purposes XYZ Pty Ltd selected, applied and documented a bona fide CUP of $21,700.

This arm's length price was reflected in the taxable income by an adjustment at item 7 Reconciliation to taxable income or loss on XYZ Pty Ltd's tax return.

Training was provided for the sales staff of one subsidiary. No amount was invoiced for this service but, in exchange, the subsidiary completed a specific research project for XYZ Pty Ltd.
XYZ Pty Ltd provided ongoing administrative services for the Hong Kong permanent establishment and invoiced these for internal accounting purposes at cost, being $10,200. XYZ Pty Ltd did not use any pricing method.

Technical and construction

XYZ Pty Ltd provided ongoing technical services regarding manufacturing processes to a subsidiary, and invoiced those services at rates equivalent to prices for similar services performed for arm's length customers. The process was not analysed in detail, neither was it documented.

The amount invoiced was $12,650.

Research and development

XYZ Pty Ltd maintained a research and development (R&D) division and incurred R&D expenditure on behalf of all subsidiaries and its own activities. Subsidiaries paid their own share of the total annual cost, and no mark-up was included in the invoiced price. The total amount was $24,600.

Loans

On 29 June 2010, XYZ Pty Ltd approved the interest-bearing loan of $450,000 to a subsidiary.

Summary of the dealings

More information

Publications

Publications referred to in these instructions

Business industry codes 2010 (NAT 1827)
Company tax return instructions 2010 (NAT 0669)
Income Tax Assessment Act 1936
Income Tax Assessment Act 1997
Income Tax Regulations 1936
Taxation Ruling TR 94/14 - Income tax: application of Division 13 of Part III (international profit shifting) - some basic concepts underlying the operation of Division 13 and some circumstances in which section 136AD will be applied
Taxation Ruling TR 97/20 - Income tax: arm's length transfer pricing methodologies for international dealings
Taxation Ruling TR 98/11 - Income tax: documentation
and practical issues associated with setting and reviewing transfer pricing in international dealings
Taxation Ruling TR 1999/1 - Income tax: international transfer pricing for intra-group services
Taxation Ruling TR 2001/11 - Income tax: international transfer pricing - operation of Australia's permanent establishment attribution rules
Taxation Ruling TR 2004/1 - Income tax: international transfer pricing - cost contribution arrangements.

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Last Modified: Thursday, 3 June 2010

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