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Question 8

Last updated 5 November 2018

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 and the pricing methodology used, and ascertain the extent to which the taxpayer has transfer pricing documentation to support those dealings.

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

You must report the total amount of expenditure you incurred, and total amount of revenue you earned or derived, for each category of services with international related parties at items 8a to 8k. For example, report the total amount of expenditure incurred and the revenue earned or derived in respect of each service category with your international related parties, not the mark-up on costs of services you received or provided in service arrangements with your international related parties.

In completing this question, exclude the following amounts, returned:

  • at question 6 relating to royalties or licence fees
  • at question 9 relating to derivative transactions
  • at question 11 relating to other dealings of a financial nature including any borrowing or lending transactions.

For the purpose of this question, a service arrangement is one that is based on the performance of work by one party for the benefit of another party (see Employers Mutual Indemnity Association Ltd v. Federal Commissioner of Taxation [1943] HCA 36; (1943) 68 CLR 165 per Latham CJ at 174).

The arrangement may be formal or informal. You may be the customer or the provider of the service.

Where the services are bundled in one charge and your accounting records do not separate them into the distinct service categories in this question, you must reasonably allocate the charge to the relevant service categories in items 8a to 8j. If you are unable to reasonably allocate all of the charge to the service categories in those items, show the unallocated amount of the charge at item 8k Other services and write a clear description of the nature of the relevant services received. These services are divided into the following categories:

Treasury related services

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

  • transaction, investment and information services relating to securities, financial assets, financial liabilities, portfolios or other assets held by yourself or an international related party
  • 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's finance.

Management and administration services

Management and administration services are activities that:

  • involve or relate to the control, facilitation, and monitoring of the taxpayer's human resources (staffing) and financial resources (assets)
  • relate to administering the day to day business operations of the taxpayer, including  
    • back office services
    • administrative services associated with employee share-based plans and recharge amounts
    • accounting services.
     

Administration services exclude activities relating to financing, marketing or production.

Insurance services

Insurance services are activities associated with the management of insurance contracts (predominantly undertaken through intermediaries). Effectively, the expenditure and revenue will represent intermediaries' commissions for providing an insurance management type service (for example, placement of the insurance portfolio to a third party or providing back office functions). The premiums or other expenditure incurred or revenue earned or derived in relation to insurance contracts with international related parties during the income year should be shown at question 11e.

Reinsurance services

Reinsurance services are activities associated with the management of reinsurance contracts (predominantly undertaken through intermediaries). Effectively, the expenditure and revenue will represent intermediaries' commissions for providing an insurance management type service in relation to reinsurance contracts (for example, placement of the insurance portfolio to a third party or providing back office functions). The premiums or other the expenditure incurred or revenue earned or derived in relation to reinsurance contracts with international related parties during the income year should be shown at question 11f.

Research and development services

Research and development services are activities associated with the undertaking of research and development services on behalf of a contracting party on a systematic basis in order to develop intellectual property, where the entity providing the research and development services does not take title to any resultant intellectual property created in the provision of the service.

Sales and marketing services

Sales and marketing services includes amounts for services in respect of sales such as amounts, including commissions, derived or paid for services to facilitate the sale of goods or services.

Marketing services includes activities that involve acquiring new customers or business and maintaining a relationship with them, including:

  • advertising
  • brand promotion
  • sales strategies
  • customer support services.

Software and information technology services

Software and information technology services are 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.

Technical services

Technical services are activities associated with engineering, architecture, design, project management and mining exploration.

Logistics services

Logistics services are activities that relate to transport, freight, storage, scheduling, sourcing and procurement.

Asset management services

Asset management services are activities associated with the management of assets, funds or investments undertaken on a discretionary basis in accordance with an investment strategy, with the provider of the services responsible for both of the following:

  • acquiring, monitoring, managing and disposing of traditional and non-traditional financial products held by the taxpayer or a related party
  • assessing, monitoring and managing the market risks associated with holding the financial products.

Other services

Other services are all other services not covered by the above categories. Item 8k Other services should only be used for reporting of amounts which are not covered by the categories of service at 8a to 8j.

To complete this question, you must:

  • identify all service arrangements between you and international related parties
  • group the service arrangements into one of the eleven service categories (including the service arrangement category referred to as Other)
  • calculate the total amount of expenditure incurred and the revenue earned or derived 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 percentage of dealings for which you have documentation
  • provide a description of the nature of the service arrangements with international related parties recorded under Other services (if applicable).

If you had international related party dealings regarding service arrangements during the income year, answer Yes at A item 8 and complete the required fields.

For your international dealings involving each type of services covered by items 8a to 8j, complete each of those items as follows:

  • At C, write the total amount of expenditure you incurred for the service type.
  • At D, write the total amount of revenue you earned or derived for the service type.
  • At E, write the Appendix 5 code for the principal arm's length pricing method used to set or review consideration for the service type.
  • At F, write the Appendix 9 code for the percentage of the international dealings for the service type for which you have documentation.

    Percentage of dealings with documentation refers to the aggregate dollar amount of transactions reported at this question for which you have relevant documentation expressed as a percentage of total dollar value of transactions reported at this question. If you applied one of the simplified record-keeping options in PCG 2017/2 Simplified transfer pricing record keeping options for your service arrangements shown at items 8a, 8b, 8h or 8i, write code 7 at F at the corresponding item.

For your international dealings involving any other kind of services, complete 8k as follows:

  • At C, write the total amount of expenditure you incurred for the other kinds of services.
  • At D, write the total amount of revenue you earned or derived for the other kinds of services.
  • At E, write the Appendix 5 code for the principal arm's length pricing method used to set or review consideration for the other kinds of services.
  • At F, write the Appendix 9 code for the percentage of the international dealings for the other kinds of services for which you have documentation.

    Percentage of dealings with documentation refers to the aggregate dollar amount of transactions reported at this question for which you have relevant documentation expressed as a percentage of total dollar value of transactions reported at this question. If you applied one of the simplified record-keeping options in PCG 2017/2 Simplified transfer pricing record keeping options for your service arrangements shown at item 8k, write code 7 at F at item 8k.
  • At H, write a description of the other kinds of services. Limit the description to 200 characters.

Example

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

Services provided and received
Services provided and received

Country

Related party

Description of service arrangement

Expenditure
$

Revenue
$

Pricing methodology code

Australia

Yes

Payroll

160,000

0

3

Belize

Yes

Admin services – recharge amounts

150,000

0

10

India

Yes

Hardware maintenance

200,000

0

12

India

Yes

Foreign exchange advice

0

210,000

1

Indonesia

Yes

Risk management

0

190,000

1

New Zealand

Yes

Risk management

0

170,000

1

Singapore

Yes

Accounting

120,000

0

10

Singapore

No

Marketing

320,000

0

na

Singapore

Yes

Management

290,000

0

1

United Kingdom

Yes

Provide training

100,000

0

1

United States

Yes

Software support

0

350,000

3

United States

Yes

Back office

0

430,000

3

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

Service arrangement type: Treasury related services
Service arrangement type: Treasury related services

Country

Expenditure
$

Revenue
$

Pricing methodology code

Percentage of documentation
%

India

0

210,000

1

6

Indonesia

0

190,000

1

6

New Zealand

0

170,000

1

6

Total

0

570,000

1

6

Service arrangement type: Management services
Service arrangement type: Management services

Country

Expenditure
$

Revenue
$

Pricing methodology code

Percentage of documentation
%

Singapore

290,000

0

1

5

Total

290,000

0

1

5

Service arrangement type: Software & information technology
Service arrangement type: Software & information technology

Country

Expenditure
$

Revenue
$

Pricing methodology code

Percentage of documentation
%

India

200,000

0

12

6

United States

0

350,000

3

6

Total

200,000

350,000

3

6

Service arrangement type: Administrative services
Service arrangement type: Administrative services

Country

Expenditure
$

Revenue
$

Pricing methodology code

Percentage of documentation
%

Belize

150,000

0

10

5

Singapore

120,000

0

10

5

United States

0

430,000

3

5

Total

270,000

430,000

3

5

Service arrangement type: Other financial services
Service arrangement type: Other financial services

Service arrangement type

Country

Expenditure
$

Revenue
$

Pricing methodology code

Percentage of documentation
%

Vocational training

United Kingdom

100,000

0

1

4

Total

na

100,000

0

1

4

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 8 as follows:

Question 8
8a Treasury related services
Label C Expenditure nil
Label D Revenue $570,000
Label E Main pricing methodology 1
Label F Percentage of dealings with documentation code 6
8b Management and administration services
Label C Expenditure $560,000
Label D Revenue $430,000
Label E Main pricing methodology 1
Label F Percentage of dealings with documentation code 5
8c Insurance
Label C Expenditure nil
Label D Revenue nil
Label E Main pricing methodology nil
Label F Percentage of dealings with documentation code nil
8d Reinsurance
Label C Expenditure nil
Label D Revenue nil
Label E Main pricing methodology nil
Label F Percentage of dealings with documentation code nil
8e Research and development
Label C Expenditure nil
Label D Revenue nil
Label E Main pricing methodology nil
Label F Percentage of dealings with documentation code nil
8f Sales and marketing services
Label C Expenditure nil
Label D Revenue nil
Label E Main pricing methodology nil
Label F Percentage of dealings with documentation code nil
8g Software and information technology services
Label C Expenditure $200,000
Label D Revenue $350,000
Label E Main pricing methodology 3
Label F Percentage of dealings with documentation code 6
8h Technical services
Label C Expenditure nil
Label D Revenue nil
Label E Main pricing methodology nil
Label F Percentage of dealings with documentation code nil
8i Logistics
Label C Expenditure nil
Label D Revenue nil
Label E Main pricing methodology nil
Label F Percentage of dealings with documentation code nil
8j Asset management
Label C Expenditure nil
Label D Revenue nil
Label E Main pricing methodology nil
Label F Percentage of dealings with documentation code nil
8k Other services (specify in label H)
Label C Expenditure $100,000
Label D Revenue nil
Label E Main pricing methodology 1
Label F Percentage of dealings with documentation code 4
Label H Provision of vocational training to staff

End of example

QC55230