Australian businesses that transact with overseas related parties may be subject to Australia’s transfer pricing rules.

What is transfer pricing?

Transfer pricing concerns the pricing and conditions applied to transactions between related entities in different countries.  For example, an Australian company may:

• purchase goods from its overseas parent company;
• provide services to an overseas subsidiary;
• pay management or administration fees to a related company;
• borrow money from an overseas related entity;
• pay interest on a related-party loan;
• licence intellectual property from another group company; or
• make other payments to an overseas related party.

Australia’s transfer pricing rules broadly require the conditions of these dealings to reflect those that would be expected between independent parties dealing with each other at arm’s length.

Small Business

The good news for smaller businesses is that complying with those rules does not always require an expensive transfer pricing report or extensive benchmarking exercise.

The Australian Taxation Office (ATO) provides a simplified record-keeping regime under Practical Compliance Guideline PCG 2017/2 – Simplified Transfer Pricing Record Keeping Options.

Small taxpayer checklist

You may qualify for the small taxpayers simplified record-keeping option if the turnover of your Australian economic group is less than $25 million and all of the following conditions are satisifed:

Turnover is under $25 million

Your Australian economic group has turnover of less than $25 million for the income year.

You have not made sustained losses

Your business has not made “Sustained losses” as that term is defined in PCG 2017/2.

You have no related-party dealings with entities in specified countries

Your international related-party dealings do not involve entities in the countries specified by the ATO for the purposes of the Guideline.

You have not undergone a restructure during the year

Your business has not undergone a restructure within the relevant income year.

You have no royalties, licence fees or R&D arrangements

You do not have related-party dealings involving:

• royalties;
• licence fees; or
• research and development arrangements.

Specified service dealings do not exceed 15% of turnover

Your specified service related-party dealings, whether expenses or income, do not exceed 15% of turnover.

You are not a distributor

If your business is a distributor, the small taxpayers option does not apply. However, you may be able to consider the separate simplified record-keeping option for distributors.

You have assessed your compliance with the transfer pricing rules

You must still assess whether your international related-party dealings comply with Australia’s transfer pricing rules.

All of these requirements must be satisfied.

Why is transfer pricing documentation important?

Having a commercially reasonable price is not necessarily enough.

A business should be able to explain:

• what the transaction was;
• who the related parties were;
• how the price was determined;
• why the arrangement was commercially appropriate; and
• why the pricing is consistent with the arm’s-length principle.

Large multinational groups often prepare extensive economic analyses, benchmarking studies and detailed transfer pricing reports.

That can be expensive and disproportionate for a smaller Australian business with relatively straightforward international dealings.

PCG 2017/2 was introduced to reduce this compliance burden for eligible taxpayers.

What does the simplified record-keeping option actually do?

PCG 2017/2 provides an administrative safe harbour for eligible taxpayers.

Where a taxpayer correctly applies an option under the Guideline, the ATO states that it will generally not allocate compliance resources to review the transactions covered by the option for transfer pricing purposes, other than reviewing whether the taxpayer was eligible to use the option.

However, the business must retain contemporaneous documentation showing how it satisfied the relevant eligibility criteria.

This is an important distinction.

The simplified option does not mean that the transfer pricing rules cease to apply. Nor does it automatically satisfy all of the statutory transfer pricing documentation requirements.

The business must still assess whether its related-party transactions comply with Australia’s transfer pricing rules.

Important exclusions: loans and capital transactions

Even if your business qualifies for the small taxpayers option, the concession does not reduce the documentation requirements for:

• international related-party financial transactions, such as loans and guarantees, and the charges associated with them; or
• international related-party dealings of a capital nature.

This can be particularly important for Australian businesses funded by an overseas parent company.

For example, an Australian company may satisfy every requirement in the small taxpayer checklist but have a substantial loan from its foreign parent.

The small taxpayers option does not automatically simplify the transfer pricing documentation required for that loan.

A separate simplified option, such as the low-level inbound loan option, may need to be considered.

Other simplified transfer pricing options

The small taxpayers option is not the only concession available under PCG 2017/2.

Depending on the nature of your business and its international dealings, other simplified record-keeping options may apply, including options relating to:

• distributors;
• intra-group services;
• low-level inbound loans;
• low-level outbound loans;
• materiality; and
• technical services.

Your business may therefore fail the small taxpayer test but still qualify for another simplified option.

What if your business does not qualify?

Not qualifying for the small taxpayers option does not necessarily mean that your business needs an expensive multinational-style transfer pricing report.

The appropriate level of documentation will depend on factors including:

• the size of the business;
• the value of the international related-party transactions;
• the nature and complexity of those transactions;
• the countries involved;
• the commercial basis for the pricing;
• whether another PCG 2017/2 option is available; and
• the level of transfer pricing risk.

For many small and medium-sized businesses, appropriately targeted documentation can address the relevant transfer pricing risks without the cost of an unnecessarily extensive economic study.  For example the ATO’s simplified approach can provide guidance to the arm’s length pricing.

Does your business need to review its transfer pricing?

You should consider your transfer pricing position if your Australian business:

• has an overseas parent company;
• owns an overseas subsidiary;
• buys or sells goods to overseas related entities;
• pays or receives management or service fees within an international group;
• borrows money from an overseas related entity;
• lends money to an overseas related entity;
• pays royalties or licence fees;
• has undertaken an international group restructure; or
• has received an ATO request concerning international related-party dealings.

Ideally, transfer pricing documentation should be prepared contemporaneously with the relevant transactions rather than reconstructed several years later during an ATO review or audit.

How Waterhouse Tax Lawyers can assist

Waterhouse Tax Lawyers assists Australian businesses with transfer pricing compliance, ATO reviews, audits and disputes.

For small and medium-sized businesses, we can:

• determine whether you satisfy the PCG 2017/2 small taxpayer checklist;
• identify whether another simplified record-keeping option is available;
• identify transactions excluded from the simplified regime;
• review international related-party arrangements;
• if not eligible for the simplified approach advise on an appropriate and proportionate level of transfer pricing documentation;
• assist with International Dealings Schedule issues; and
• represent businesses in ATO transfer pricing reviews and audits.

Our approach is to ensure that the documentation is appropriate to the size, complexity and risk of the business rather than automatically recommending the extensive transfer pricing studies typically prepared for large multinational groups.

Need help with transfer pricing?

If your business has transactions with an overseas parent, subsidiary or other related entity and you are unsure whether your transfer pricing documentation is adequate, contact Waterhouse Tax Lawyers to discuss your position.

This article provides general information only and is not legal or tax advice. The application of Australia’s transfer pricing rules and PCG 2017/2 depends on the particular facts and circumstances of each taxpayer.