Australia’s transfer pricing rules were modified in February 2020 to specify that the OECD transfer pricing guidelines 2017 edition is the relevant guidance material for income years after 2017. That amendment updated the much earlier major changes to Australian transfer pricing laws when subdivision 815-B (general rules), C (permanent establishments), and D (trusts and partnerships) of the Income Tax Assessment Act 1997 apply from 2013. The aim was to ensure that the amount brought to tax in Australia from non-arm’s length dealings should reflect the economic contribution by the Australian activities.
On 815-B focuses on whether an entity gets a transfer pricing benefit (that is, a tax advantage). That benefit arises where entities have “commercial or financial relations” (that is, for example, where the entities have entered into agreements that would help reduce their costs in the tax code), that the “actual conditions” of those relations are different from what would prevail under “arm’s length conditions,” (that is, the relationships are different from what would occur under freely negotiated conditions), that the actual condition satisfies a “cross border” test (that is, the cross-border tests in Division 815 that (a) the entity has a fixed establishment, and (b) the entity is party to a tax treaty and either the entities’ taxable income would have been greater or losses would have been less. Through the application of this process, the arm’s length conditions are substituted for the actual conditions to work out the correct amount of taxable income or loss.
When applying the transfer pricing legislation, the legislation refers to the “commercial or financial relations” or “actual conditions”. The arm’s length conditions are those that are ordinary to expect between independent entities deal wholly independently with one another in comparable circumstances.