• Simplifying transfer pricing record-keeping – frequently asked questions

    We developed some simplified transfer pricing record keeping options so certain eligible businesses can opt to minimise some of their record-keeping and compliance costs for three consecutive income years, the first of which starts on or after 29 June 2013.

    The guidelines are published in the Simplifying Transfer Pricing Record Keeping online guide. The following questions and answers should be read in conjunction with it.

    Frequently Asked Questions

    Does applying an option mean the transfer pricing rules don’t apply to me?

    No. The transfer pricing rules apply to you irrespective of whether you are eligible and choose to apply an option. We expect when you lodge your return you do so on the basis you have applied the transfer pricing rules to any relevant transaction or arrangement you have undertaken and you are satisfied the statutory test set out in subdivision 815-B or 815-C of the ITAA 1997 has been met.

    What happens when you apply a simplified transfer pricing record-keeping option?

    If you are eligible for any option, the transactions or arrangements to which the options applies won't be reviewed for transfer pricing purposes beyond the conducting of a check to confirm your eligibility. This assurance currently applies for three consecutive income years, as follows:

    • on or after 29 June 2013 for small taxpayers, distributors, intra-group services, and low level loans inbound options
    • on or after 1 July 2015 for materiality, management and administration services, and technical services options.

    This compliance assurance is specified in the simplifying transfer pricing record keeping online guide and within the PS LA 2014/3.

    If you have appropriately elected to apply any simplification record keeping options, then tax officers will not review transfer pricing records relating to the relevant cross border conditions between entities (CBCBEs) beyond conducting a check to confirm your eligibility.

    However, you are still required to maintain the general record keeping requirements under section 262A of the Income Tax Assessment Act 1936.

    Can branches apply the simplification options?

    Yes. If you are required to report at question 18 of the International Dealings Schedule, and have satisfied the relevant eligibility criteria, then you can elect to apply the appropriate simplification option.

    Can trusts and partnerships apply the simplification options?

    Yes. If you are a trust or partnership, and have satisfied the relevant eligibility criteria, then you can elect to apply the appropriate simplification option.

    What transfer pricing documentation code should you use for the 2015–18 period if you are applying a simplification record keeping option?

    If you are eligible, and have elected to apply a simplified record keeping option, you would include code 7 at the percentage of documentation label code at the relevant labels on the International Dealings Schedule (IDS). This confirms you have self-assessed your relevant transactions as complying with the transfer pricing rules and advised us that a simplification option has been applied to your record keeping.

    What transfer pricing documentation code should you use for the 2014 year if you are applying a simplification record keeping option?

    For the 2014 year the simplification option code is not available. When completing the percentage of documentation label code at the relevant labels on the IDS you need to consider the application of the existing documentation codes. If you are contacted by the ATO and you have applied one of the simplification options, you will need to notify the compliance officer of your eligibility.

    The codes available for the 2014 year relate specifically to whether you have prepared contemporaneous transfer pricing documentation. You will need to use one of the following codes to state to what extent you have documentation:

    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

    What is meant by 'have assessed your compliance with the transfer pricing rules'?

    Applying a simplified transfer pricing record keeping option does not, of itself, meet the requirements of Subdivision 284-E and Subdivision 815-B or 815-C. Selecting an option does not limit or waive how the law operates, but demonstrates you have self-assessed your relevant transactions for compliance with the transfer pricing rules.

    When you select an option, you do so on the basis you have done all you sensibly need to do in your circumstances to make sure your cross border dealings satisfy the arm’s length principle as set out in Subdivision 815-B or 815-C.

    Example: meeting the criteria

    CBSW is an Australian subsidiary of MJ Inc, an American company from which it borrowed A$20 million. For the 2014 financial year, CBSW had a taxable income of $8 million, no other related party dealings and there were no restructures. It is the only member of the Australian economic group and the interest charged on the loan was A$260,000 (1.3%) such that it meets the first five eligibility criteria for the low level loans simplified record-keeping option.

    The remaining criterion to consider is whether CBSW is compliant with the transfer pricing rules.

    The loan and its interest rate are consistent with the group’s third party debt and the overall level of debt does not have a significant impact upon its economic viability. CBSW believes it has satisfied the arm’s length principle and there is no transfer pricing benefit arising from the transaction.

    Accordingly, CBSW can elect to apply the option to its interest-bearing loan and interest paid to MJ Inc.

    End of example

     

    Example: not meeting the criteria

    As above, except the interest charged on the loan was A$1,320,000 (6.6%) such that it still meets the first five eligibility criteria for the low level loans simplified record keeping option. However, the interest rate change of $1,060,000 occurred without material change in any relevant circumstances to the loan arrangement and only due to the option criteria.

    CBSW cannot demonstrate it has satisfied the arm’s length principle and there is no transfer pricing benefit arising from the transaction.

    Accordingly, CBSW cannot elect to apply the option to its interest-bearing loan and interest paid to MJ Inc.

    End of example

    Can small business taxpayers or distributors be eligible for other simplification options?

    Yes. All options have their own eligibility criteria which you would need to consider in isolation for determining if you can elect to apply the relevant option.

    For example, a business with a turnover between $0 and $25 million may not be able to apply the small taxpayers option due to the other criterion, but still be eligible for the intra-group services or low level loans option. A distributor with a turnover between $0 and $50 million may also be eligible for the materiality or management and administration services options.

    Example: Multiple Options

    CJ is an Australian subsidiary of JBN Limited, a United Kingdom company, from which it purchased goods, received management services and paid royalties. For the 2016 financial year, CJ had a turnover of $8 million and was the only member of the Australian economic group. It had no dealings with specified countries, no restructures and had a mark-up on cost of services of 4.7%.

    During the year, CJ paid $260,000 royalties, $3.5 million for goods, and $1 million for management services. CJ is not eligible for the small taxpayers or materiality options due to the payment of royalties. However, CJ is eligible for the management and administration services, as the fees paid for management were 21% of total international related party dealings ($4,760,000).

    CJ believes it has satisfied the arm’s length principle and there are no transfer pricing benefits arising from the transactions. It has also satisfied the other two criterion for the option to be available.

    Accordingly, CJ can elect to apply the option to its management services fees paid to JBN.

    End of example

    What is meant by Australian economic group?

    The online guide definition states that for the purposes of the simplification options, an 'Australian economic group consists of an entity together with all the entities it is required by the Australian accounting standards to include in consolidated financial statements.'

    Australian Accounting Standard AASB 10 is relevant here and refers to an entity that controls one or more other entities to present a consolidated financial statement in which the assets, liabilities, equity, income, expenses and cash flows of the group are presented as those of a single economic entity. It also defines and explains how to apply the principle of control in determining the group.

    Please note there is no mention of tax consolidation in the definition. Accordingly, it follows that it is not determinative of what is an ‘Australian economic group’ in this context.

    How is the term ‘Australian economic group’ applied in determining the turnover eligibility criterion?

    If the Australian accounting standards require entities to be included within a consolidated financial statement, then the revenue for the purposes of the simplification transfer pricing record keeping options is the amount that would be reported by that consolidated group of entities.

    Example: meeting the criteria

    Three companies have a combined turnover of $65 million and are part of the same MEC group for tax consolidation purposes. Tascom ($26 million turnover) and Tasco ($17million turnover) prepare a consolidated financial statement in accordance with AASB 10. Tachco ($22 million turnover) files an individual financial statement with ASIC as it does not need to be consolidated under AASB 10.

    Accordingly, there are two Australian economic groups. The turnover to determine eligibility for either the small taxpayers or distributors options in these circumstances will be:

    • $43 million for Tascom and Tasco
    • $22 million for Tacho.
    End of example

    Do the references to related party dealings refer to international related party dealings?

    Yes. For the purposes of applying the simplification transfer pricing record keeping options, the following references within the online guide relate to international related party dealings:

    • related-party dealings with entities in the specified countries
    • related party dealings involving royalties, licence fees or R&D
    • specified service related party dealings

    How is the total international related party dealings determined for the operation of the materiality, management and administration services, and technical services options?

    The total international related party dealings used in the development of the three options takes into account the following expense and revenue amounts (labels based on the 2015 IDS), but does not include the balance of any loans recognised in your accounting records:

    • tangible property of a revenue nature (label 5)
    • royalties or licence fees (labels 6a and 6b)
    • rent or leasing (label 7)
    • services (labels 8a to 8k)
    • derivatives (label 9)
    • financial dealings excluding loan balances (label 11 excluding 11a and 11b)
    • other revenue dealings (label 12)
    • branch operation dealings excluding loan balances:
      • interest (labels 18aj and 18bj)
      • internal trading stock transfers (label 18c)
      • other dealings (label 18d).
       

    The calculation differs from that used in determining the IDS lodgement threshold of A$2 million as it does not include loan balances and needs to consider the relevant dealings for all entities within its Australian economic group.

    How do trusts and partnerships determine if they satisfy the ‘sustained losses’ criterion?

    You cannot apply a simplification option if you have sustained losses. For the purposes of these options, a loss is calculated by subtracting the sum of the total expenses labels from the sum of the total income labels on your income tax return.

    Example: 2014 income tax return

    For a company you would use label 6S total income and label 6Q total expenses.

    For a partnership you would use the sum of labels 5(C+D+B+E+F+G+H), 8(A+Z+B+R+F), 9F, 10Q, 11J, 12(K+L+M), 14O, 22 (M+U+X), and 23B for total income. The total expenses would be the sum of labels 5O, 8(S+T+G), 9(G+X+H), 16P, 17D, 18Q, 23(B-V).

    For a trust you would use the sum of labels 5(C+D+B+E+F+G+H), 8(A+Z+B+R+F), 9F, 10Q, 11J, 12(K+L+M), 14O, 22 (M+U+X), and 23B for total income. The total expenses would be the sum of labels 5O, 8(S+T+G), 9(G+X+H), 16(P+R), 17D, 18Q, 23(B-V).

    End of example

    What documentation is required to demonstrate you have satisfied the eligibility criteria?

    Where you are seeking to rely on any of the simplified options, it is expected you will self-assess your eligibility as well as substantiate it. It is expected you keep contemporaneous documents that corroborate your eligibility. These do not need to be comprehensive, but they should simply and sensibly explain how and why you were eligible to apply any options.

    However, self-assessment by assertion in the absence of any corroborating documents will not suffice.

    What is the denominator for the profit before tax ratio?

    The profit before tax ratio is based on the following labels from your income tax return:

    Sum of the total income labels less the sum of the total expenses labels
    Sum of the total income labels

    How is the weighted average calculated with respect to the profit before tax ratio criterion?

    The profit before tax ratio is calculated for three consecutive years, including the year for which you are considering applying the distributors option. The three-years total income and three-years total expenses are added together and used to determine the three-year profit before tax. That result is divided by three years' turnover to reach the weighted average profit before tax ratio.

    Example: Weighted Average

    Australco is the only member of an Australian economic group and reported the following amounts in its income tax returns:

    Year ended 30 June

    2014

    2015

    2016

    3 year average

    Total Income $

    20,600,000

    17,000,000

    26,000,000

    21,200,000

    Total Expenses $

    18,800,000

    16,500,000

    24,740,000

    20,013,333

    The calculation of profit before tax ratio for the three years is:

    Profit Before Tax

    $1,186,667

    Turnover

    $21,200,000

    Profit Before Tax Ratio

    5.5975%

    Accordingly, for the 2016 year, the weighted average would be 5.60%.

    End of example

    How will the ATO assess whether services are strategic or significant? Will the core/non-core distinction under the previous services concessions be considered?

    There are no specific indicators.

    Whether something is strategic or significant is a question of fact having regard to the specific circumstances and activities of the business. It is expected you would take a reasonable approach.

    There is no reference to the core/non-core definition in TR 1999/1 Income tax: international transfer pricing for intra-group services in the online guide. That Taxation Ruling does not apply to the current transfer pricing provisions and is not relevant when applying the simplification options.

    Does the exclusion of financial transactions mean you cannot have any such dealings to apply the small taxpayers, distributors or intra-group services options?

    The three options do not apply to international related party financial transactions. However, this does not mean you are excluded from applying the options to other transactions that satisfy the eligibility criteria.

    If you have international related party loan transactions you need to consider the criteria within the low level loans option, to determine if any inbound loan component could be eligible for simplified record keeping.

    For all other international related party financial transactions, you would be expected to contemporaneously document your relevant related party dealings and, more specifically, consider the requirements of Division 284-E of Schedule 1 to the Tax Administration Act 1953. Interpretive guidance can be found in TR 2014/8 Income tax: transfer pricing documentation and Subdivision 284-E.

    For intra-group services, does the focus on mark-ups mean the cost base needs to satisfy the transfer pricing principles?

    Yes. The cost base should be consistent with the transfer pricing rules, the arm’s length principle and the 2010 OECD Guidelines.

    TR 1999/1 Income tax: international transfer pricing for intra-group services does not apply to the current transfer pricing rules.

    For intra-group services, can entities in the financial sector apply the simplification option?

    Yes. The exclusion of financial transactions from the application of the intra-group services option covers specific industry based transactions. Entities within the financial sector may have services that are not financial in nature, for example management or sales and marketing services.

    An entity in the financial sector that has satisfied the relevant eligibility criteria for intra-group services can elect to apply the simplification option to their non-financial services.

    Does the ‘combined cross-border loan balance’ include independent parties or just loans with related parties?

    The 'combined cross-border loan balance' includes loans to and from third parties as well as related parties.

    What is a loan for the application of the low level loans simplification option?

    To be classified as a loan for the purposes of this option, the instrument must be a debt interest under Division 974 of the Income Tax Assessment Act 1997.

      Last modified: 07 Apr 2016QC 47403