If you have international transactions with a related party – eg a loan from your foreign subsidiary – your Australian tax will be affected if the amounts for the transaction do not comply with the arm’s length principle under the transfer pricing rules.
Transfer pricing is the process of working out the prices for goods and services sold between controlled (or related) legal entities within an enterprise. For example, if a subsidiary company receives goods from a parent company, the cost of those goods paid by the subsidiary to the parent is the transfer price.
When pricing is incorrect and does not comply with Australia’s transfer pricing rules then the ATO and other tax jurisdiction get concerned. It is often referred to as ‘international profit shifting’.
Australia’s double-tax agreements and domestic law require that pricing of goods and services and allocation of income and expenses between related parties comply with the arm’s length principle.
Documenting the transfer pricing requirements will impose a significant burden on SME taxpayers. In many cases this will be disproportionate to their risk of not complying with the transfer pricing rules. The ATO has developed some simplified transfer pricing record-keeping options so eligible businesses can minimise record-keeping requirements and compliance costs.
There are seven simplified transfer pricing simplified options available. For example, if the annual turnover of the economic group in Australia less than $50m and other factors are met then you may be eligible. If you meet one or more of these options, you may only need to document your eligibility.
Transfer pricing rules are becoming increasingly complex. Ensure that your group of companies comply with Australian tax law.
We can help your group with its transfer pricing arrangements by:
• Assisting in responding to an ATO risk review/audit including strategy advice, drafting letters and meeting with the ATO.
• Working with you to understand the future strategy of your business and to design an optimal transfer pricing structure based on their value chain and the location of key operational personnel/assets/risks in the business.
If you are an SME business with international transactions don’t panic.
Please contact Waterhouse Lawyers and tax advisers as we will be able to work with you to ensure you have comfort with your transfer pricing taxation obligations.