Transfer Pricing for Multinationals

Under Australia’s self-assessment regime, Public Officers are now obligated to determine their businesses’ compliance with transfer pricing prior to signing the tax return. Adjustments will be expected to be made where non-compliance with the rules has led to lower taxable income in Australia.In addition to penalties on the company in the event of non-compliance, Public Officers can be held personally liable for false or misleading information.

We recommend Public Officers ensure that the business prepare a minimum level of transfer pricing documentation to substantiate the position taken in the tax return, and the transfer pricing documentation must satisfy the Australian transfer pricing requirements, not just foreign prepared documentation that does not address the local laws.

Australian transfer pricing rules focus on arm’s length profit for the Australian entity rather than the arm’s length price for a particular transaction.Loss making entities in Australia continue to be a focus point of the ATO through their risk engine analysis. The transfer pricing legislation has been drafted in a way that may allow the ATO to treat the incurrence of losses as evidence of the existence of non-arm’s length conditions if it cannot be supported from a commercial perspective.
The legislation also includes reconstruction powers which are focus on profits-based methods and gives the ATO the power to “reconstruct” a transaction if the business cannot support the commercial and financial reasons for the existing transactions.
If your business is loss making, transfer pricing documentation is critical to outline the commercial rationale of continuing low profits or losses.

Although it is not compulsory to prepare transfer pricing documentation, failure to prepare formal transfer pricing documentation by the time a tax return is lodged will result in a minimum penalty of 25% being applied to any subsequent adjustment made by the ATO. You will also not be able to support you had a “reasonably arguable position”.

In practice we recommend transfer pricing documentation is prepared by lodgement of the tax return, otherwise how can the public officer be comfortable that the transfer pricing is arm’s length when they sign the tax return?

Taxpayers with international related party dealings of more than $2million per year need to lodge an International Dealings Schedule (IDS) with their annual income tax return.
The $2 million includes not only the transactions such as the purchase of products or payment for services, but also the loan balances owed or lent to other related parties.

The IDS is a detailed form requiring full disclosure of all international related party transactions, the main transfer pricing method that is applied to each transaction, along with a disclosure as to the level of specific transfer pricing documentation held for that particular transaction or dealing.

With the IDS, the ATO is better able to assess the transfer pricing risk of each taxpayer. Armed with this information, the ATO is performing increased data matching that will allow it to undertake more targeted and focused compliance activities.

While all taxpayers with international related party transactions are subject to transfer pricing rules, there is an increased chance of ATO scrutiny and focussed audit questions for taxpayers where these transactions are more than $2m.

For these taxpayers, maintaining contemporaneous transfer pricing documentation is highly recommended.

Our team has extensive experience in various areas of transfer pricing including:

• transfer pricing planning
• documentation requirements
• planning and compliance related to Base Erosion and Profit shifting (BEPS) action plan
• assisting in client risk reviews and audit defences
• advising effective international planning structures.

All our team members have dedicated experience in transfer pricing across various industries. Our transfer pricing practitioners also have extensive experience in different jurisdictions including US, Europe, Malaysia and South East Asia, Australia and the rest of the Asia Pacific Region.

Firm director Shannon Smit is recognized for her technical expertise at the highest levels, both in Australia and Internationally with her appointment to the Australian Governments Board of Taxation Advisory Panel and also winner of the Asia Pacific Transfer Pricing Leader of the Year at the highly acclaimed Asia Tax Awards.

We have expertise advising companies in most industries including:

• financial institutions
• pharmaceutical
• software
• resource sector
• food and beverage companies
• manufacturing and distribution
• retail and services
• fin tech / SAAS
• asset management
• commodities and trade
• chemicals