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Transfer pricing – related party dealings

Income not subjected to domestic tax due to non-arm's length conditions of international related party dealings.

Last updated 21 May 2024

Our focus

We focus on non-arm’s length conditions with respect to cross-border dealings and arrangements that result in an Australian entity getting transfer pricing benefits. For information on concept and risk, see International transfer pricing – concepts and risk assessment.

Non-commercial financing arrangements

Situations that attract our attention include entities entering into financing arrangements with international parties on non-commercial terms that generate excessive interest deductions or non-recognition of income in Australia. Such arrangements may not necessarily take place between related parties or associates.

Related-party financing arrangements

We're seeing instances of related party funding arrangements where the terms and conditions are non-arm’s length resulting in higher interest rates and excessive debt deductions. These arrangements include inbound financing for investments and projects in the property and construction industry and may give rise to transfer pricing benefits. We focus on such arrangements and will review them having regard to the facts and circumstances including the features of the financing arrangements and other factors, the conduct of the parties and options realistically available to the entities at the time.

We're encouraging taxpayers to improve their compliance approach by:

  • adopting behaviours consistent with keeping their cost of capital as low as possible having regard to the commercial objectives
  • paying attention to income tax compliance, including transfer pricing by adopting arm’s length terms and conditions and documenting the substance of their related party financing arrangements
  • monitoring funding arrangements including when circumstances change
  • ensuring interest withholding tax obligations are met and reported on a timely basis including annual reporting
  • paying greater attention to lodgement and disclosures required in the International Dealings Schedule on an annual basis, including those for thin capitalisation
  • continue to monitor developments in the law and public advice and guidance to ensure ongoing compliance.

We also focus on outbound funding when on non-arm’s length terms, such as outbound interest free loans.

For information on our compliance approach, see PCG 2017/4 ATO compliance approach to taxation issues associated with cross-border related party financing arrangements and related transactions.


Related party service arrangements

We are seeing instances of related-party service fees being paid offshore that don't meet the benefits tests required for deductibility in accordance with TR 1999/1 concerning transfer pricing for intra-group services.

Mischaracterisation of management services

We are concerned with arrangements that mischaracterise transactions as the provision of management services where all functions in relation to the offshore entity are either performed by staff in Australia or outsourced to third party providers that are directed by the Australian employees. These arrangements may cause a transfer pricing benefit to arise and may trigger other anti-avoidance provisions.

Customer and supplier contracts or relationships moved offshore

We are concerned with arrangements where pre-existing customer and supplier contracts or relationships are moved from an Australian entity to an offshore entity creating a transfer pricing benefit. We will seek to understand the commercial rationale for the change and seek evidence to support the arm's length nature of the transaction.

Shifting Australian assets or operations offshore

We are concerned about business restructures that shift Australian assets or operations offshore without arm's length compensation or appropriate recognition for their inherent underlying commercial value.

Offshore hubs that derive high profits

We are concerned about offshore hubs that derive high profits from marketing or procuring goods or services for Australian operations.

PCG 2017/1 ATO compliance approach to transfer pricing issues related to centralised operation models involving procurement, marketing, sales and distribution functions sets out our compliance approach to transfer pricing issues related to the location and relocation of certain business activities and operating risks into a centralised operating model. For information on record keeping see, PCG 2017/2 Simplified transfer pricing record-keeping options.