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  • Treating multiple transfer pricing arrangements as a single RTP Category A or B position

    Circumstances, arrangements or transactions that are subject to transfer pricing rules are treated as a single Category A or B position when all of the following apply:

    • the facts associated with the circumstances, arrangements or transactions are the same or similar for the purposes of the position, or are related to each other in a way that it makes it necessary to take them into account together to determine their treatment for tax purposes
    • a common conclusion is reached on the tax treatment of those circumstances, arrangements or transactions – that is, there is a common basis for lodgment.

    Calculating materiality for transfer pricing positions

    You only have to disclose RTPs where the tax (or notional tax) affected by the position exceeds your materiality amount. The methods for working out the tax or notional tax affected by an RTP are described below.

    Related party dealings covered by section 284-255 compliant transfer pricing documentation

    Materiality calculation is based on the difference in the tax you would have paid if your transfer price was based on the fixed benchmark or the median of the arm’s length range and the tax you actually paid. This is because Commissioner initiated transfer pricing assessments generally move a taxpayer's transfer pricing position to the median of the arm’s length range.

    Related party dealings not covered by section 284-255 compliant transfer pricing documentation

    You can base your materiality calculation on either:

    • applying the relevant accounting standards to quantify the uncertainty
    • calculating the difference in the tax you would have paid if you used a transfer price based on the arm’s length price and the tax you actually paid.
    Applying accounting standards to determine uncertainty

    AASB 112 Income Taxes specifies requirements for current and deferred tax assets and liabilities. An entity applies the requirements in AASB 112 based on applicable tax laws. AASB Interpretation 23 Uncertainty over Income Tax Treatments clarifies how to apply the recognition and measurement requirements in AASB 112 when there is uncertainty over income tax treatments.

    Where you have used the recognition and measurement methods specified in AASB Interpretation 23 to calculate the value of tax uncertainty for a tax position, your position is material where that value exceeds your materiality threshold.

    See Guidance on AASB Interpretation 23 This link will download a file.

    In these instances, the position is also a Category B RTP.

    Arm’s length calculations

    If you haven't conducted a transfer pricing comparability study, you can base your materiality calculation on either:

    • the benchmarks listed in Practical Compliance Guide PCG 2017/2 Simplified Transfer Pricing Record Keeping Options, as described below (note: you can apply the benchmarks in your materiality calculation only if you meet the relevant qualifying requirements in PCG 2017/2 for the safe harbour benchmark you are applying)
    • a conservative approach, where a transaction type is not covered by PCG 2017/2.

    Related party revenue and expenditure are separate positions so you must not net them off in calculating materiality. You can also have multiple transfer pricing positions covering different income or expense items, see Treating multiple transfer pricing arrangements as a single RTP Category A or B position for more information.

    Materiality for outbound transfer pricing positions

    Conservative approach – materiality calculation is based on the gross value of outbound supplies you are making multiplied by the tax rate.

    Benchmarks – the following are the established benchmarks and calculations for determining amounts to use in your materiality calculation, where you:

    • made a loan to a related entity, the amount of interest you would have returned if you charged the rate for the year as specified in PCG 2017/2 (4.34% in 2017, 3.79% in 2018 and 3.76% in 2019) less the amount of interest you actually returned
    • are providing services to a related entity, the amount of income you would have returned from providing        
      • low value adding intergroup services had your mark-up been 5% less the amount of income you actually returned
      • technical services had your mark-up been 10% less the amount of income you actually returned.
    Materiality for inbound transfer pricing positions

    Conservative approach – your materiality calculation is based on your total deduction for inbound supplies multiplied by the tax rate.

    Benchmarks– the following are the established benchmarks and calculations for determining amounts to use in your materiality calculation, where you:

    • are deducting interest on a loan from a related party, the amount of interest you actually deducted less the amount of interest you would deduct if the interest rate for the year was the rate specified in PCG 2017/2 (4.34% in 2017, 3.79% in 2018 and 3.76% in 2019)
    • are receiving services from a related party, the amount you deducted for        
      • low value adding intergroup services you received less the amount you would have deducted had the supplier’s mark-up been 5%
      • technical services you received less the amount you would have deducted had the supplier’s mark-up been 10%.
    Applying the benchmarks for transfer pricing positions

    You can only apply the benchmarks in your materiality calculation if you meet the relevant qualifying requirements in PCG 2017/2 for the administrative safe harbour benchmark you are applying.

    For example, if have low level outbound loans, you have to satisfy all conditions in PCG 2017/2 (except for the interest rate benchmark) to apply the benchmark in your materiality calculations. For you to satisfy the conditions that a distributor would have to satisfy, you must:

    • have a combined cross-border loan balance below $50 million
    • in each of the loans      
      • the funds actually provided by you under the loan are Australian dollar funds and this is reflected in your loan agreements, and
      • your associated expenses are paid in Australian dollars
    • have not made sustained losses
    • not have related-party dealings with entities in specified countries
    • not have undergone a restructure within the year
    • not have related-party dealings involving royalties, licence fees or research and development arrangements
    • have assessed your compliance with the transfer pricing rules.

    Where you don't met these conditions you have to apply the conservative approach.

    Last modified: 23 Jul 2020QC 58955