• Question 13

    Attention

    Warning:

    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

    End of attention

    Transfer pricing risks arise in respect of service arrangements between Australian taxpayers and international related parties. To quantify these risks we need to identify the nature and significance of these service arrangements.

    A service arrangement is generally a negotiated agreement between parties where one party is a customer and the other is a provider. The arrangement may be formal or informal. You may be the customer or the provider.

    These services are divided into the following categories:

    Guarantees

    Service activities associated with contracts under which a party agrees to perform an obligation or discharge a liability of another entity should that entity fail to do so.

    Treasury related services

    Activities involved in the managing of the taxpayer's financial operations, including:

    • the generation of internal and external funding
    • risk management systems development and review
    • the management of currencies and cash flows
    • complex strategies, policies and procedures relating to the taxpayer finance.

    Management services

    Activities involved in the control, facilitation, and monitoring of the taxpayer's human resources (staffing) and financial resources (assets).

    Insurance

    Activities associated with insurance contracts (predominantly undertaken through intermediaries). Effectively, the expenditure and revenue will represent intermediaries' commissions.

    Reinsurance

    Activities associated with reinsurance contracts (predominantly undertaken through intermediaries). Effectively, the expenditure and revenue will represent intermediaries' commissions.

    Marketing

    Activities that involve acquiring new customers or business and maintaining a relationship with them, including:

    • advertising
    • brand promotion
    • sales strategies.

    Software and information technology services

    Activities involved in the support and maintenance of software and technology used by the taxpayer. Activities relating to the ownership of the software and technology are excluded, such as leasing and rental fees.

    Administrative services

    Activities that relate to the operation of the taxpayer, including:

    • back office services
    • administrative services associated with employee share-based plans/recharge amounts
    • accounting services.

    Excludes activities relating to financing, marketing or production.

    Other financial services

    All other services not covered by the above categories.

    In completing this question exclude the following amounts, returned:

    • at question 8, relating to royalties
    • at question 10 relating to derivative transactions
    • at question 14, relating to any borrowing/lending transactions.

    The dollar amounts or values asked for in this question are all to be based on your accounting records.

    If you had international related party dealings regarding service arrangements during the income year, answer yes to this question and complete the required fields.

    To complete this question, you need to:

    • identify all service arrangements between you and international related parties
    • group the service arrangements into one of the nine service categories (including the service arrangement category referred to as 'Other')
    • calculate the total amount of expenditure incurred and the revenue earned in respect of each service category
    • identify the principal arm's length pricing method used to set or review consideration in respect of each service arrangement undertaken with international related parties
    • identify the principal service arrangements with international related parties recorded under the label 'Other financial services' (if applicable).

    In the first column, labelled Expenditure, provide the total amount of expenditure incurred in respect of each service category.

    In the second column, labelled Revenue, provide the total amount of revenue earned in respect of each service category.

    In the third column, labelled Pricing methodology specify the principal arm's length pricing method used to set or review consideration in respect of each service category.

    Further Information

    For the list of pricing methodology codes, see Appendix 6.

    End of further information

    In the last row at AD, if you reported expenditure or revenue under 'Other financial services', provide a description of the principal service arrangement undertaken in this service category (limit your description to 200 characters).

    Example

    During the income year an Australian taxpayer provided and received the following services.

    Country

    Related party

    Description of service arrangement

    Expenditure

    Revenue

    Pricing methodology code

    Andorra

    Yes

    Providing guarantees

     

    140,000

    1

    Australia

    Yes

    Payroll

    160,000

     

    3

    Belize

    Yes

    Admin services - recharge amounts

    150,000

     

    10

    Bermuda

    Yes

    Providing guarantees

     

    200,000

    12

    India

    Yes

    Hardware maintenance

    200,000

     

    12

    India

    Yes

    Foreign exchange advice

     

    210,000

    1

    Indonesia

    Yes

    Risk management

     

    190,000

    1

    New Zealand

    Yes

    Risk management

     

    170,000

    1

    Singapore

    Yes

    Accounting

    120,000

     

    10

    Singapore

    No

    Marketing

    320,000

     

    na

    Singapore

    Yes

    Management

    290,000

     

    1

    United Kingdom

    Yes

    Provide training

    100,000

     

    1

    United States

    Yes

    Providing guarantees

    340,000

     

    1

    United States

    Yes

    Software support

     

    350,000

    3

    United States

    Yes

    Back office

     

    430,000

    3

    The Australian taxpayer extracts the relevant data from the information above.

    Service arrangement type

    Country

    Expenditure

    Revenue

    Pricing methodology code

    Guarantees

     

    Andorra

     

    140,000

    1

     

    Bermuda

     

    200,000

    12

     

    United States

    340,000

     

    1

    Total

    340,000

    340,000

    1

    Treasury related services

     

    India

     

    210,000

    1

     

    Indonesia

     

    190,000

    1

     

    New Zealand

     

    170,000

    1

    Total

     

    570,000

    1

    Management services

     

    Singapore

    290,000

     

    1

    Total

    290,000

     

    1

    Software & information technology

     

    India

    200,000

     

    12

     

    United States

     

    350,000

    3

    Total

    200,000

    350,000

    3

    Administrative services

     

    Belize

    150,000

     

    10

     

    Singapore

    120,000

     

    10

     

    United States

     

    430,000

    3

    Total

    270,000

    430,000

    3

    Other financial services

    Vocational training

    United Kingdom

    100,000

     

    1

    Total

    100,000

     

    1

    In completing this question the Australian taxpayer will disregard:

    • the expenses incurred in respect of the marketing services provided by the entity located in Singapore, as the entity is not related to the taxpayer
    • the payroll service undertaken with the related Australian based entity, as the arrangement is not a cross border transaction.
     

    With this information the Australian taxpayer completes question 13 as follows.

    Example of question 13 completed

    Last modified: 09 Nov 2011QC 24292