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When a transfer pricing position is a reportable tax position

Last updated 24 August 2021

You must report a transfer pricing position not covered by section 284-255 (Taxation Administration Act 1953) compliant transfer pricing documentation in Category A on the schedule. The lack of compliant documentation means there's insufficient information to determine if it's more likely to be correct than incorrect.

If your dealings are covered by compliant documentation, your position is a Category A or B reportable tax position if it falls within the high-risk zone of published ATO guidance and isn't a Category C position.

Where a transfer pricing position is a Category C reportable tax position you must disclose this position in section C not in section B as a Category A or B reportable tax position.

You need to separately report revenue and expenditure based transfer pricing positions. However, you can combine and report all related party revenue, or related party expenditure, as a single Category A reportable tax position.

Exemption for foreign banks or other qualifying financial entities

If your entity is a foreign bank or other qualifying financial entity to which Part IIIB of the ITAA 1936 applies and hasn't elected out of Part IIIB, you don't need to disclose a transfer pricing position for a notional borrowing it holds where:

  • the notional borrowing is in a currency(ies) quoted in the London Interbank Offered Rate (LIBOR) or an agreed proxy and in a comparable tenor
  • the deductions associated with the notional borrowing have been capped at the appropriate LIBOR rate.

This exemption applies even if your entity's notional borrowing isn't covered by section 284-255 compliant documentation.

This exemption doesn't apply if your entity has a notional borrowing that isn't:

  • denominated in a currency(ies) quoted in LIBOR
  • covered by section 284-255 compliant documentation.

In this case, you must disclose the transfer pricing position associated with the notional borrowing as a Category A reportable tax position.

See also:

Calculating materiality for transfer pricing positions

You only have to disclose Category A reportable tax positions where the tax (or notional tax) affected by the position exceeds your entity's materiality amount. You can base the materiality calculation on either:

  • applying the relevant accounting standards to quantify the uncertainty
  • arm's length calculations.

Applying accounting standards to quantify the 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 explains 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 entity's position is material where that value exceeds its materiality threshold.

See also:

Arm’s length calculations

If your entity has conducted a comparability study that has established an arm's length range, its materiality calculation is based on the difference in the tax it paid, and what it would have paid, if the transfer price was based on the median of that arm’s length range.

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

  • the benchmarks listed in Practical Compliance Guide PCG 2017/2 Simplified transfer pricing record keeping options if your entity meets the relevant qualifying requirements in PCG 2017/2 for the benchmark you are applying
  • a conservative approach, where a transaction type isn't covered by PCG 2017/2 or your entity doesn't meet the conditions in PCG 2017/2.

If using a benchmark in PCG 2017/2, the materiality calculation is the difference between the tax your entity paid and what it would have paid had its transfer price been based on the benchmark from PCG 2017/2.

The materiality calculation, under the conservative approach, is:

  • outbound transactions – the cost of the outbound supplies your entity is making multiplied by the tax rate
  • inbound transactions – your entity's total deduction for inbound supplies multiplied by the tax rate.

Related party revenue and expenditure are separate positions, so you must not net them off in calculating materiality.

See also:

  • PCG 2017/2 Simplified transfer pricing record keeping options