With the increasing scrutiny from the Australian Taxation Office (“ATO”) in transfer pricing matters over the recent years, the burden and cost of compliance are taking its toll on taxpayers, particularly, the small to medium businesses. Documentation requirements of Subdivision 284-E can impose an administrative burden on taxpayers, disproportionate to their risk of not complying with the transfer pricing rules. Considering the challenges faced by taxpayers, the ATO developed Simplified Transfer Pricing Record Keeping (“STPR”) options in 2014 to allow certain taxpayers which meet the criteria to minimise their record keeping cost. As such, the ATO issued the Practical Compliance Guideline (“PCG 2017/2”) to provide guidance on the practical application and procedures of the STPR options.
On 9 January 2019, the ATO issued an updated PCG 2017/2 which comprised significant changes that may require taxpayers to revisit their
transfer pricing policies.
What are the key changes and implications with the recent ATO PCG 2017/2 introduced in January 2019?
With the updated version of PCG 2017/2 recently released by the ATO on 9 January 2019, some significant changes were made to various
criteria that need to be considered by taxpayers before the STPR concessions can be applied. The key changes reflected in the recent version
of the PCG 2017/2 include:
The management and administration option has been consolidated into the new low value adding intra-group services option which aligns with the Organisation for Economic Co-operation and Development (“OECD”)’s simplified approach to low-value adding intra-group services dealings.
With the introduction of this option, taxpayers are given some leeway in meeting some criteria such as the de minims threshold criterion.
With the increase in the de minims threshold (AUD 1 million to AUD 2 million), more taxpayers may be able to qualify for the option.
The definition of low value adding intra-group services and specified service dealings have been reworded to be aligned with the OECD Guidelines to exclude more services which reduced the flexibility of applying this option.
Nevertheless, the reduction in mark-up rates (7.5% to 5%) and changes on other tests would mean that taxpayers will need to scrutinise and re-assess their intra-group service arrangements in meeting the criteria.
The turnover threshold to qualify for the small taxpayers option has been doubled from AUD 25 million per annum to AUD 50 million per annum. This will mean that more taxpayers within the Small and Medium Enterprises space are likely to qualify for this option. However, as mentioned above, the new definition for specified service dealings may restrict taxpayers to apply this option. Small taxpayers may need to reanalyse the services thoroughly to clearly distinguish the services from the specified service dealings.
This new threshold is a welcome change and is applicable for the small taxpayers, distributors and materiality options. In the previous guideline, any dealing of this type would exclude taxpayers from qualifying for the STPR regardless of whether they met other criteria. With the introduction of the threshold, there is a greater possibility for taxpayers to be eligible to apply for the STPR concession.
A very significant change made by the ATO in the recent PCG 2017/2 is to adapt similar interest rates for the inbound loans to reflect the interest rates used for outbound loans. The interest rate ceiling of inbound loans at 6.44% for the 2018 income year was based on Reserve Bank of Australia (“RBA”) indicator was fairly high while the new ceiling is not very forgiving with an interest rate of only 3.76% for the 2019 income year. The significant cut of the interest rate would certainly disable the eligibility for many taxpayers that relied on the criteria previously and create the need for taxpayers to re-evaluate their pricing policy in respect of inbound loans (especially the December balancers) to be able continue qualifying for the option. In such cases, the inbound loan arrangements will need to be restructured to a lower rate.
The introduction of the new criterion where the total turnover is limited to amounts not more than AUD 100 million which means the maximum total international related party dealings allowed is AUD 2.5 million.
The removal of the specified country criterion provides a positive change for taxpayers especially businesses with low risk transactions with the specified countries. Under the previous STPR guideline, any dealings with specified countries exclude the taxpayers from qualifying for the STPR option despite meeting other criteria.
When do the changes apply?
The changes in the PCG 2017/2 apply to income years beginning on or after 1 July 2018 (for substituted accounting periods beginning on or after 1 January 2018).
Applying the STPR options equals no documentation, true or false?
On 22 February 2017, the ATO issued the PCG 2017/2 to provide guidance on the practical application and procedures of the STPR options available to date.
The PCG 2017/2 states that where taxpayers choose to use a STPR option, they need to inform the ATO in their International Dealings Schedule (“IDS”) as part of the Income Tax Return. If a taxpayer discloses in the IDS that it is using the STPR options, the Company needs to assess and document how it satisfies ALL the eligibility criteria.
The ATO is not expecting to allocate significant resources to review cross-border transactions or arrangement where taxpayers have selected
a STPR option in the IDS. This means that, to some extent, taxpayers with transactions eligible for STPR options are in a low-risk
However, from a compliance perspective, the ATO expects taxpayers to keep contemporaneous documentation to show how the taxpayers are eligible to the STPR options. This is particularly important given that the eligibility criteria are strict and there are a number of conditions that should be met by the taxpayers to be eligible.
Our firm has extensive experience in assisting taxpayers with the application of the STPR options. We can assist with the assessment of eligibility of your business in applying the STPR options, preparation and review of the International Dealings Schedule and drafting of contemporaneous documentation required as per the PCG 2017/2.
Contact Transfer Pricing Solutions. We can assist with the preparation of cost effective transfer pricing documentation locally and regionally, transfer pricing planning, and Country-by-Country reporting statements.
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Contributed by our Consultant Kaval Aulakh
Kaval works as a Consultant for Transfer Pricing Solutions Australia, Transfer Pricing Solutions Asia and Transfer Pricing Solutions Malaysia.
Kaval has more than five years of experience in various areas of transfer pricing assignments such as transfer pricing documentation, comparability studies, shared costs allocation and Mutual Agreement Procedure (MAP).
In her spare time, Kaval enjoys socialising, reading and playing badminton.