Simplified transfer pricing documentation? It sounds like an oxymoron, or too good to be true, but guidance issued by the Australian Taxation Office (ATO) now means that many smaller and mid-sized businesses with international transactions can escape the cumbersome and costly transfer pricing documentation obligations they have historically grappled with.
Transfer pricing laws aim to ensure that businesses with international related party transactions pay the right amount of tax on the right amount of profits in each country that they have dealings with. This is achieved by applying an arm’s length test. The international related party transactions need to be priced as if arm’s length conditions existed – i.e. what would truly independent parties have paid for a comparable transaction.
Transfer pricing laws, and the way they are enforced by the ATO, means that businesses need to maintain specific documentation to show how they have met the arm’s length requirement. This goes beyond price lists and intercompany agreements. A detailed functional analysis of the global business as well as benchmarking studies on the Australian business’ international transactions will usually be needed. This can be a costly exercise.
The Simplified Transfer Pricing Record Keeping Options (“STPRKO”) issued by the ATO means that detailed and costly transfer pricing documentation is a thing of the past for many smaller and mid-sized businesses. What’s more, the ATO will not undertake a transfer pricing audit on businesses that apply STPRKO. A big part of managing transfer pricing is managing risk, and the STPRKO are a very effective way to remove the risk of an ATO review.
What situations are covered?
There are a range of situations where a STPRKO is available. Each situation has its own specific conditions that need to be met, but in broad terms the options can be available in any of the following situations:
- The business has turnover of less than $25M in Australia
- Distributors with a profit before tax ratio of at least 3%
- Routine intra-group services priced on a cost plus 7.5% basis of less than $1 million, or 15% of total revenue or expenses (as appropriate)
- Management and administration services priced on a cost plus 5% basis
- Technical services priced on a cost plus 10% basis
- Low value inbound loans (less than $50m), denominated in AUD and where the interest rate does not exceed an RBA indicator rate
- Low value outbound loans (less than $50m), denominated in AUD and where the interest rate equals or exceeds a specified interest rate
- Where the total international related party transactions are less than 2.5% of turnover
What are the common exclusions?
The STPRKO are focused on low risk transactions, so businesses undertaking higher risk transactions may be excluded from applying these concessions for some or all of their dealings. The main situations where an exclusion can apply are:
- The business has made sustained losses
- There are dealings with low tax jurisdictions
- The Australian business or its functions have been restructured
- The international transactions are for royalties, licence fees or R&D arrangements
How do you choose to apply the STPRKO?
As well as meeting the specific conditions for a particular STPRKO, to apply a STPRKO a business needs to have a reasonable basis for concluding that they should comply with the transfer pricing laws (i.e. that they meet the arm’s length requirement). This is the potentially tricky part, and one where businesses need to exercise a level of diligence and ensure the basis for their conclusion can be substantiated.
When the annual income tax return is completed, the choice of applying a STPRKO is notified to the ATO on the International Dealing Schedule.
The Simplified Transfer Pricing Record Keeping Options bring real benefits for smaller and mid-sized businesses with international transactions. Not only do they reduce costs, but they take away transfer pricing tax risks.
Businesses that don’t qualify for the STPRKO (or don’t use them) need to appreciate that transfer pricing is a hot issue for the ATO and an area where we are expecting significant tax audit activity over the next few years.