Simplified transfer pricing record keeping can save an Australian entity with a related offshore entity a lot of time and money. If an Australian entity qualifies then it just has to document how it qualifies.

Transfer Pricing explained simply

At its simplest, Transfer Pricing is like deciding how much you should pay yourself when you wear two hats – one as a seller and another as a buyer.

Imagine you own a bakery and a café. If you sell cakes from your bakery to your café, you have to decide how much you’re going to charge for those cakes. Or you have online clothing business and a IT business.  How much do I charge for my IT services. This is transfer pricing.

For small businesses, it’s about setting fair prices for goods or services when they move between different parts of the same company.  It’s important because it affects how much profit each part of the business makes and how much tax they pay.

Small enterprises should keep records to show how they decide on these prices, to make sure they’re not unfairly shifting profits to pay less tax. This could include things like comparing prices with similar products in the market or using a cost-plus method where you add a fair profit margin to the cost of making the product.

Keeping good records helps to show that everything is fair and square.

Transfer pricing between Australian and offshore entities

In Australia, when an Australian company is owned by offshore (foreign) owners and engages in transfer pricing, it is regulated by the Australian Taxation Office (ATO).

The ATO ensures that transactions between the Australian entity and its offshore owners or related companies are conducted at arm’s length, meaning they are priced fairly as if the two parties were unrelated.

Transfer pricing is based on global rules and guidelines and what is required in documentation can be both daunting and complex.

The ATO uses the arm’s length principle to ensure that profits are not artificially shifted offshore to avoid Australian taxes. If they suspect that transfer pricing is being used to avoid taxes, they can investigate and adjust the prices of goods or services transferred between the Australian entity and its offshore owners.

Simplified approach

There is, however, a simple answer for smaller international businesses or those with simple transactions.

The ATO has stated that the extent of transfer pricing documentation required should be commensurate with the size of your business or transactions.  The ATO has provided a  simplified approach to transfer pricing.

If eligible for this approach and certain benchmarks are met on different type of transactions then extensive documentation is not required. For example Australian businesses distributing products in Australia purchased from their related company overseas with turnover in Australia under $50m are eligible.

By following these guidelines and ensuring compliance with Australian transfer pricing regulations, Australian entities with offshore owners can minimize the risk of tax audits and penalties.

Good News and Bad News

The first lot of bad news is whether you qualify for the simplified record keeping or not doesn’t change that you still need to apply one of the five methodologies. So you still need to understand the five methods and then apply one of them

The second bad news is that you still have to document how you qualify for the simplified rules. But that is easier than documenting the actual transfer price. That’s the bad news.

Now to the good news. If you qualify for the simplified record keeping you don’t have to document the method. You can basically just say ‘Yeah, I did that.” and don’t have to prove and document the method.

And the second good news is that the criteria for simplified recording keeping are easier to understand than the five methodologies. The criteria are quantifiable. They are about turnover, profit, the amount of related party transactions, that sort of thing.

Complying with Australian transfer pricing rules

To comply with the simplified transfer pricing record keeping rules, you need to:

1. Keep detailed records:

maintain comprehensive records of your transfer pricing policies and transactions to demonstrate that prices are set at arm’s length.

2. Conduct benchmarking studies:

may need to compare their transfer prices with those of similar transactions between unrelated parties to ensure they are within acceptable ranges.

3. Document transfer pricing policies:

have clear policies in place for determining transfer prices, including methodologies used and factors considered.

4. Cooperate with the ATO:

Cooperate with the ATO during transfer pricing audits or investigations, providing relevant information and documentation when requested.

How can Waterhouse Lawyers help?

Waterhouse Lawyers can help determine whether a company is eligible for simplified transfer pricing record keeping and assist with complying with these rules.