November Newsletter - Common misconceptions about transfer pricing documentation updates

What are the most common misconceptions about transfer pricing documentation updates?

The OECD released on October 2015, the final report on Transfer Pricing Documentation and Country by Country Reporting, Action 13. The report emphasises, among others, on the importance for taxpayers to prepare contemporaneous transfer pricing documentation to support the prices of the international related party dealings. The report also confirms that is critical for taxpayers to periodically review and update the transfer pricing documentation in order to ensure that the information is accurate and reliable[1]

We are hearing from many companies having trouble understanding what contemporaneous documentation really means and what are the practical implications. The following case study summarises our experience with the most common misunderstandings.

Case study

AusCo is a subsidiary of ForCo, a company located in the United States. AusCo main business is the distribution of electronic products in Australia; AusCo purchases finished goods from ForCo to sell in Australia.

AusCo has prepared transfer pricing documentation for the income year ended 30 June 2011. The transfer pricing documentation included a benchmarking analysis prepared by ForCo for 30 June 2011; the search included companies located in the United States engaged in the distribution activities with third parties in similar conditions to the distribution arrangement between AusCo and Forco.

AusCo will be submitting the 30 June 2015 income tax return and International Dealings Schedule (IDS) in the next month and has advised their tax agent to disclose that AusCo has 100% transfer pricing documentation (Code 6) to support the prices of its purchases of finished goods from its international related party ForCo.

1. Can AusCo use a search that includes companies located in the United States? The ATO[2] has a preference for local comparable companies over overseas comparable companies. To use overseas comparable companies, taxpayers need to demonstrate that there is no data available in Australia. In practice, it is possible to find companies engaged in distribution activities with third parties located in Australia and therefore the ATO is likely to question a search with companies located in the United States whilst the tested company is located in Australia.
2. Can AusCo use a search performed in 2011 to support the prices of its purchases of finished goods from international related parties? No, taxpayers are expected to perform new searches every three years and update the financial data of the comparable companies in the search, every year in order to reliably apply the arm’s length principle[3].
3. Is there anything else that AusCo should consider? The OECD and the ATO recommend reviewing the transfer pricing documentation every year to ensure that the functional and economic analyses are still consistent with the business model of the Company. AusCo should also review the factual information and functional analysis to ensure that the current business model is reflected.
4. Can AusCo disclose that has 100% transfer pricing documentation to support the responses of the IDS? No, AusCo does not have 100% contemporaneous transfer pricing documentation to support the responses of its IDS as it transfer pricing documentation does not comply with Australia’s transfer pricing legislation and with the most recent guidance from the OECD on transfer pricing documentation.

If your company is facing any of the issues described above? If you require assistance please contact Transfer Pricing Solutions on 03 5911 7001 or email admin@transferpricingsolutions.com.au.