The publication of this report implements recommendation 3.6(1)(c) of the Inspector-General of Taxation (IGoT)’s 2012 report ‘Review into the Australian Taxation Office’s management of transfer pricing matters’.
This report reflects our consultation with both large market (LME) and small-to-medium market business entities (SMEs) and their advisors, on the impact of the International Dealings Schedule (IDS). It also outlines to what extent the aims of reduced compliance costs have been achieved.
Client reach and engagement
Invitations were sent to:
- industry bodies that were members of the Division 815 working group
- transfer pricing specialists from accounting and law practices
- LMEs which self-submit the IDS
- SMEs which submit the IDS with or without external professional assistance.
We directly contacted IDS self-submitters in various industries including manufacturing and engineering, logistics and shipping, banking and finance, energy and resources, marketing and distribution, construction and building, technology and science, and retail and services.
Discussions were held via teleconference as well as face-to-face meetings.
Who we consulted with
We consulted with:
- 7 industry bodies
- 6 major accounting and law practices
- 80 LME and SME IDS lodgers invited
- 673 corporate tax managers and finance professionals through seminars in five capital cities
- IDS reporting and compliance costs, and use of natural business systems in IDS reporting.
- IDS lodgment via paper, electronic lodgment service (ELS) or the standard business reporting (SBR).
- The impact of tax law changes, including new transfer pricing documentation requirements.
- The ATO’s IDS reporting assistance services.
- Specific IDS reporting requirements and suggestions for modifications.
Common issues and findings
- The IDS has streamlined income tax return reporting for international business and transactions by combining and replacing Schedule 25A, International Dealings Schedule – Financial Services and Thin Capitalisation Schedule from 2012.
- Information reported in the IDS is sourced from natural business accounting and information systems.
- There's been no increase in compliance costs stated by any group from the IDS after the first year of the IDS (2012 income year).
- While not resulting from IDS reporting itself, the transfer pricing documentation requirements in Subdivision 284-E means there hasn't been an incremental reduction in overall compliance costs each year.
- Ongoing IDS reporting and compliance costs are significantly minimised by SMEs and LMEs using tailored accounting and data processing models and/or setting up appropriate business accounting and data systems.
- SMEs and LMEs expressed the desire for long-term stability in IDS reporting requirements.
- Most IDS self-submitters engage accounting firms to provide quality assurance of their internally prepared IDS and associated transfer pricing documentation.
- Compliance with IDS reporting was assisted by the availability of timely ATO assistance services provided through the IDS Project mailbox corporate email box, email@example.com
- There were sufficient opportunities for consultation on changes to IDS reporting resulting from new transfer pricing laws (from 2014 income year).
- The diversity of issues and circumstances impacting on IDS reporting means ongoing ATO reporting assistance and targeted guidance is required.
SME specific issues and findings
Consultations revealed SMEs wanted the ATO to re-assess:
- the $2 million de minimis threshold for IDS reporting of international related party dealings (IRPD), including how the threshold impacts on loans or one-off transactions
- the compliance burden for some SMEs versus the information the ATO needs to assess and manage international tax risks.
The ATO will consider the de-minimis threshold for reporting of IRPDs in the IDS, including in light of the Country-by-Country (CbC) reporting requirements applying from the 2016 income year.
LME specific issues and findings
LMEs wanted to avoid overlap between the IDS and the new local file under CbC reporting which applies to entities with annual global income of $1 billion or more.
The ATO has designed the local file to reduce duplication of IDS and local file reporting taking into account how:
- lodgment dates for the local file under CbC legislation do not align with lodgment of the IDS in the tax return
- approximately 90% of entities lodging the IDS are not expected to be providing a local file, eg because their global income is less the $1bn CbC threshold.
The ATO has designed the local file so that entities providing the full local file are not required to complete the IDS questions covering IRPDs (questions 2 to 17 of the IDS) if they voluntarily lodge Part A of the local file with their tax return.
LMEs also commented on the impact of the new transfer pricing documentation requirements in Subdivision 284-E.
Some LMEs expressed the view they shouldn't be subject to IDS or CbC reporting for their IRPDs because they provide the ATO with sufficient information under other processes, such as Annual Compliance Arrangements (ACA).
Relevant factors and ATO findings are:
- The ATO amended the IDS instructions to clarify that, for the purpose of selecting ‘percentage of dealings with documentation’ codes, documentation does not need to satisfy the requirements under Subdivision 284-E.
- Subdivision 284-E documentation requirements affect whether there is a reasonably arguable position. Subdivision 284-E requirements are relevant if there is ultimately an adjustment to taxable income because of how transfer pricing provisions apply to relevant dealings.
- The IDS is part of the entity’s tax return and is certified as correct by the entity’s public officer.
- Sections B to F of the IDS cover information not covered in the local file including information on:
- applying the thin capitalisation rules
- attributable income of foreign subsidiaries under the CFC rules.
- ACA or other compliance review processes for individual LMEs do not ensure the information collected in the IDS or the local file is provided by the LME.
- The IDS is designed to collect information that is used by the ATO for high level risk assessment, case selection and for reporting to Government.
- The local file will collect more detailed information about IRPDs than questions 2 to 17 of the IDS, enabling more effective high level risk assessment of profit shifting through IRPDs.
- SMEs indicated compliance costs for the first year of the IDS (2012 income year) was mainly due to staff time, to understand the new IDS reporting requirements.
- Completing the IDS for subsequent years has been easier and does not involve significant incremental compliance costs.
Natural business accounting and information systems
Most SMEs indicated they use their natural business accounting and information systems such as MYOB and SAP to produce the data and information to fill out the IDS.
Using these natural business systems lowers compliance costs in IDS reporting beyond initial investment in the systems.
- A number of SMEs expressed a preference for a simplified IDS format reflecting their relatively lower turnover and level of related party dealings.
- SMEs also said they preferred IDS reporting to be stable to keep compliance costs at current levels.
- It was acknowledged IDS design means only applicable parts need to be filled out by SMEs with more simple international dealings.
- Feedback was generally that the IDS instructions contain appropriate guidance for how to complete the IDS, including instructions for new questions reflecting law changes such as the new transfer pricing rules.
- Some SMEs said the instructions were too long. Other SMEs said they were not detailed enough, e.g. they didn't cover all aspects of our Taxation Rulings on new transfer pricing rules.
- Differing SME opinions reflected differing complexity of their international business structures and dealings.
$2 million dollar de minimis threshold for reporting IRPDs in Section A
- SMEs said the increase of the de minimis threshold from $1 million to $2 million for the transition to the IDS from the former Schedule 25A, reduced compliance costs.
- Some SMEs actually felt the current $2 million threshold should be lower to reflect the current business environment (including CPI and foreign exchange rates).
- SMEs could have a one-off IRPD transaction that tipped them over the $2 million threshold.
Country reporting at questions three and four
- The incremental compliance costs of SMEs reporting IRPD expenditure and revenue for the top three overseas countries was less than the incremental compliance costs of reporting different kinds of transactions in the former Schedule 25A
- SMEs may have IRPDs with only a few overseas countries
Activity codes for questions three and four
Some SMEs would have preferred a modified list of activity codes such as:
- grouping of some codes
- more categories
- activity codes more consistent with the business activities across the SME market.
- The ATO should bring the IDS to discussions or meetings with the SME in a review / audit so the SME can know how the IDS is used.
- There could be a shorter IDS for any SME that only has to complete Section A of the IDS.
- SMEs only need to produce the information required in the IDS if the ATO conducts an audit / review of the SME.
- The $2 million IRPD threshold for completing Section A of the IDS should be increased, with some SMEs providing the following specific suggestions:
- increasing by an amount reflecting inflation
- taking foreign currency exchange rates into account
- a special higher threshold for loans.
- The majority of LMEs appreciated why the ATO needs the information reported at the IDS.
- LMEs welcomed how the IDS replaced and amalgamated Schedule 25A, International Dealings Schedule – Financial Services and Thin Capitalisation Schedule.
- The IDS reporting assistance provided by the ATO via IDS Project mailbox and direct discussions and meetings helped LMEs and their tax advisors understand IDS reporting requirements.
- Compliance costs of commencing IDS reporting differed:
- for LMEs with higher business turnovers, key costs were for systems and software
- for LMEs with lower business turnovers, key costs included setting up Excel spreadsheets.
- Compliance costs for preparing the IDS were generally in a diminishing trend since the first year of the IDS.
- Nominal compliance costs tend to be higher for Australian owned LMEs because they have a wide range of international dealings.
- The level of ongoing compliance costs depend on whether LMEs have business reporting and accounting systems which produce the figures reported in the IDS.
- Apart from the costs associated with upfront investment in information systems, compliance costs were mostly due to preparation of transfer pricing documentation and associated transfer pricing analysis.
- The requirements under Subdivision 284-E for establishing reasonably arguably positions have increased these compliance costs.
- There were no significant incremental costs associated with complying with changes to the IDS reflecting legislative changes after the first year of IDS reporting.
- It was suggested LMEs in the banking industry have higher compliance costs due to:
- the high volume of their related party financial transactions
- the sophisticated or specialised nature of some of their related party financial transactions
- the need to manually process the data generated from their historical business systems via Excel spreadsheet in order to produce the country breakdown figures for IRPDs required in questions three and four of the IDS.
Natural business systems
- LME’s generally preferred to have IDS reporting aligned with their natural accounting and information systems.
- Natural business accounting and information systems required for statutory reporting and stock exchange listing rules are sufficient to capture and collate values for international dealings with controlled entities and associates.
- Ongoing IDS reporting costs are therefore potentially higher for LMEs who have significantly expanded offshore but do not currently use enterprise accounting and information systems.
- Feedback indicated some LMEs in the banking industry:
- needed to undertake more sophisticated technical analysis for specialised financial transactions with their related parties
- tended to retain piecemeal historical business and information systems which did not produce all the figures required in the IDS
- may spend up to six weeks to prepare the IDS because of their resulting need to manually prepare the IDS figures.
- LMEs would prefer as little change to the IDS as possible to avoid the need for adjustment or development of their information systems.
- LMEs said:
- they would prefer delay of any significant changes to the IDS until after Australia had implemented the OECD BEPS actions items
- we should balance the compliance costs of changes against the ATO’s ability to use the additional IDS information.
Activity codes for questions three and four
- The cost of determining the applicable activity codes for relevant IRPDs shown at questions three and four was higher than expected for the first year of the IDS (2012 income year).
- A small number of LMEs suggested ANZSIC Industry codes be substituted for the activity codes used in questions three and four, however most LMEs indicated the activity codes better reflect their relevant business activities than ANZSIC codes.
Reporting of IRPDs
- Some LMEs raised the issue of how to report recharge of costs with international related parties.
- The ATO advised reporting of revenue/gains and expense/losses for recharge arrangements is based on their accounting records as for other IRPDs, and can't be excluded from the IDS because there is no net margin or profit.
- Some LMEs wanted a de minimis threshold for having to report amounts for the different kinds of service arrangements in Question 8, so they could instead report aggregated amounts for all kinds of IRPD service arrangements if they were below the threshold.
- LMEs wanted more clarity about the difference between amounts required to be reported:
- at Question 8 of the IDS for ‘insurance’ and ‘reinsurance’ service arrangements with international related parties
- at Question 11 of the IDS for insurance and reinsurance with international related parties.
- The ATO has since amended the IDS instructions to clarify:
- amounts shown at Question 8 are for services associated with the management of insurance or reinsurance contracts, including placement of insurance to third parties or back office functions
- amounts shown at Question 11 are for premiums or other revenue from the provision of insurance or reinsurance, or premiums or other expenditure for obtaining insurance or reinsurance.
Q15 (Share based employee remuneration)
- LMEs suggested:
- Question 15 should include employee stock options to better align with tax returns and because LMEs used employee stock options more often than share based employee remuneration
- accounting amounts should be reported for employee stock options instead of tax amounts, especially where share-based remuneration is not being deducted.
Q17 (Restructuring events)
- Most LMEs said they thought Question 17 was too broad, with some LMEs providing the following specific suggestions:
- introducing a materiality or de minimis threshold for reporting of the ‘top 3’ restructures
- excluding specific kinds of restructuring events such as issue of shares.
Q18 (Amounts deducted or returned for dealings with own branch operations)
- LMEs in the banking industry said Question 18:
- does not apply to all Australian banks and financial institutions because of differing structures and strategies adopted for overseas markets
- should have a de minimis threshold for Australian entities with overseas branch operations.
- Some LMEs suggested the transfer pricing methodology and documentation codes required at questions 5 to 13 for IRPDs should also be required at question 18 to align with requirements under subdivision 284-E and subdivision 815-C.
- The transfer pricing methodology and associated documentation codes are not applicable to Question 18 because subdivision 815-C confirms that determining the arm’s length profits attributable to a PE involves allocating the actual income and expenditure of the entity.