The Australian Taxation Office (ATO) have released a range of safe harbours that enable some SME taxpayers to simplify their transfer pricing (TP) record-keeping requirements and eliminate the risk of an ATO TP review for an initial three year test period. If an SME meets the safe harbor conditions and elects to apply the simplified record keeping the ATO will not review the TP records of the entity other than to confirm their eligibility to apply the concession.
Guidance in relation to the application of these new requirements is provided by ATO Practice Statement Law Administration (PSLA) 2014/3 titled " Simplifying transfer pricing record keeping"; in turn, this document refers to ATO online guidance Simplifying Transfer Pricing Record Keeping.
Taxpayers that are eligible to take advantage of the simplified TP record-keeping options are required to continue to complete the International Dealings Schedule ("IDS") in all respects. Application of one or more of the simplified TP record-keeping options is evidenced by notating "Code 7" for the 'percentage of dealings with documentation code' in the 2015 and future IDS forms. In the 2014 form this code is unavailable and we suggest code 6 be inserted in the relevant section of the IDS and the ATO immediately advised of your eligibility to apply the simplified TP record-keeping options if it makes any transfer pricing related enquiry.
- Overview of "safe harbours"
The ATO simplification measures apply to the following low-risk taxpayers:
- Small taxpayers with turnover between $0 and $25 million, (refer section 4 below); and
- Small distributors with turnover between $0 and $50 million (refer section 5 below).
In addition, "safe harbour" type arrangements also apply to where taxpayers have:
- Certain intra-group service fee arrangements (refer section 6 below); and
- Inbound loans of up to $50 million in Australian dollars (refer section 7 below).
- The main "eligibility criteria"
The main criteria to be satisfied if taxpayers are to be eligible to apply any of the safe harbour concessions are that taxpayers:
- Do not suffer "sustained losses"; defined as "losses for three consecutive years";
- Do not have related party dealings with entities in "specified countries"; defined by way of a list of countries (generally regarded as tax havens);
- Have not undergone a "restructure" within the year; very broadly defined to include inter alia the disposal or acquisition of entities, the reduction, liquidation or relocation of business operations etc.;
- Have self-assessed compliance with the transfer pricing rules; this requires taxpayers to retain all records and documents necessary to adequately explain all transactions and calculation of amounts disclosed in their income tax return including documenting their position to confirm their eligibility to apply the simplified record-keeping option(s).
The above eligibility criteria are common to all taxpayers that wish to take advantage of the simplified TP record-keeping options. In addition to the 'common' criteria, further conditions apply to each of the possible options (discussed below) and "small taxpayers" and "distributors" must not have:
- Related party dealings involving: royalties; licence fees or R&D arrangements;
- Loans and guarantees (subject to comments at section 7 below); or
- International related-party dealings of a capital nature.
- Small taxpayers
Small taxpayers are defined to include all taxpayers (except distributors) with a turnover of up to $25 million for the 'Australian economic group'.1 To satisfy the "small taxpayer" eligibility criteria a taxpayer cannot have "specified service related-party dealings" (either as expenses or as income) greater than 15% of turnover. 'Specified service related-party dealings' is defined as those services that "...contribute(s) significantly to the creation, enhancement or maintenance of value in the Australian economic group..." Examples are provided in the ATO online guidance.
Distributors are defined as an entity that has an ANZIC wholesale trade code; that is, an entity whose primary functionality is the purchase and on-selling of goods whether as principal or commission agent with turnover for the Australian economic group of up to $50 million.
The principle additional eligibility "criteria" that applies to distributors (but not to any other small taxpayers) is that they must derive a "profit before tax ratio" of 3% or more. Profit before tax ratio is defined as total income less total expenses according to a taxpayer's income tax return; the ratio is the weighted average of three consecutive years including the current year.
- Intra-group Services
Taxpayers are eligible to apply the simplified record-keeping options for intra-group services if their international related party service dealings are either:
- $1 million or less; or
- Greater than $1 million, but for services you receive and/or provide - the total amount derived by you or charged by you must not be more than 15% of the total revenue or expenses (as the case may be) of the Australian economic group.
- The mark-up on cost is:
- 7.5% (or more) for services provided; or
- No more than 7.5% for services received; and
- There are no "specified service related-party dealings".
- Related Party Inbound "Low-level Loans"
The ATO has specified narrow eligibility criteria if taxpayers are to avail themselves of this simplification option. The criteria are as follows:
- The option applies to inbound interest-bearing loans and associated charges; that is, outbound loans are excluded from this option.
- Your "combined cross-border loan" balance is $50 million or less at all times throughout the year; defined to include all interest bearing and interest-free loan balances for amounts borrowed and loaned (without any net-off).
- The loans and related expenses must be denominated in Australian dollars and this must be reflected in loan agreements.
- The interest rate is no more than a specified Reserve Bank of Australia indicator lending rate for small business; variable; residential secured; term.
What to do next
If you meet the conditions the safe harbor eliminates your chance of being subject to a costly ATO TP review. We recommend you consider whether your entity meets the requirements and if so you document the compliance with the requirements. You can still apply the intra group services and low level loan concessions even if you do not meet the other concessions.
We commend the ATO for starting to address the question of TP documentation simplification measures. The disappointment is that the simplification measures apply to relatively few taxpayers; accordingly, as the ATO acknowledges, compliance with Australia's transfer pricing rules will, for many, continue to "... impose an administrative burden on an entity that is disproportionate to their risk of not complying with the transfer pricing rules."2
1The "Australian economic group" is defined as an entity together with all other entities it is required by Australian accounting standards to include in consolidated financial statements.
2Refer PSLA 2014/3 paragraph 4 and ATO "Simplifying transfer pricing record keeping" online guidance.
This publication is issued by Moore Stephens Australia Pty Limited ACN 062 181 846 (Moore Stephens Australia) exclusively for the general information of clients and staff of Moore Stephens Australia and the clients and staff of all affiliated independent accounting firms (and their related service entities) licensed to operate under the name Moore Stephens within Australia (Australian Member). The material contained in this publication is in the nature of general comment and information only and is not advice. The material should not be relied upon. Moore Stephens Australia, any Australian Member, any related entity of those persons, or any of their officers employees or representatives, will not be liable for any loss or damage arising out of or in connection with the material contained in this publication. Copyright © 2014 Moore Stephens Australia Pty Limited. All rights reserved.