AUTHORS

Mintiwab Tafesse, Director in Tax Advisory at RSM Melbourne, specialising in tax planning, transfer pricing, and international tax advice, with a focus on intercompany financial transactions.
Mintiwab (Minty) Tafesse
Director
Meet Liam, leading RSM Australia's International Tax & Transfer Pricing practice with over 20 years of experience. Specialising in transfer pricing, international tax compliance, and advisory services for multinational clients.
Liam Delahunty
Partner

On 11 September 2019, the ATO released an update to Practical Compliance Guideline (“PCG”) 2017/2, in respect of Simplified Transfer Pricing Record Keeping (“STPRK”) options for lower-risk transactions.

The changes relating to the safe harbour rate on “low-level” inbound and outbound loans, and now provide for 2.33% as the maximum rate for inbound loans and the minimum rate for outbound loans.

The changes take effect in relation to the 2020 income year. As such, for 30 June balance-date entities, this change has apparently already applied since 1 July 2019. For 31 December year-ends, the change will take effect from 1 January 2020. 

This represents a further reduction from the rate for the 2019 income year, which was 3.76%, with the rate for the year immediately before that being 6.45% (again as both maximum rates for inbound loans and minimum rates for inbound loans).

Low-Level Inbound Loans

By way of recap, to qualify for the STPRK option in relation to “low-level” inbound loans, an Australian taxpayer must satisfy the following criteria:

1. A combined cross-border loan balance of A$50 million or less for its Australian economic group at all times throughout the year

2. For each of its inbound loans:

  • the interest rate is no more than the following rate for each of the income years which the loan is in effect (3.76% in the 2019 income year, 2.33% in the 2020 income year)
  • the funds actually provided under the loan are AUD funds and this is reflected in the loan agreements, and
  • associated expenses are paid in AUD

3. No “sustained losses’ (i.e. no losses in the year in question as well as the two prior years)

4. No “restructure” within the year in question (i.e. no transfer of functions, assets or risks to an international related party), and

5. Compliance with the transfer pricing rules has been assessed.

Low-Level Outbound Loans

To qualify for the STPRK option in relation to “low-level” outbound loans, an Australian taxpayer must satisfy the same criteria, with the applicable interest rates as specified becoming minimum rates, rather than maximum rates.

Commentary 

The STPRK options are intended to reduce the compliance burden for groups which are seen to bear a low risk of transfer mispricing. The trade-off is that the qualifying for STPRK can involve meeting a bar which presents a very low-risk from an Australian perspective.

Given Australia’s status as a net capital importer, this change is anticipated to have a broader practical impact for inbound loans, than it will for outbound loans.

In this regard, the potential concern is that what may be seen as low-risk from an Australian perspective, could well be seen as high-risk from the perspective of the foreign jurisdiction of the counterparty. Will foreign revenue authorities regard an interest rate of 2.33% on interest income as sufficient? Or will they seek a rate that adheres to, or at least comes close to, the arm’s length lending rates? By way of illustration, current headline retail lending rates for small businesses tend to be at least 5%. 

There is a retrospective element to the application of this rate, for the year ending 30 June 2020. Hopefully, the ATO will accept a practical approach for 30 June year-end groups wishing to comply with the reduced 2.33% rate in the current year.

For inbound taxpayers who are reluctant to reduce their rate to 2.33%, it is important to note that the STPRK options are not requirements that must be adhered to, and non-compliance with the STPRK options does not mean that a taxpayer’s transfer pricing position is incorrect, as the ATO confirms. It merely means that such taxpayers will need to satisfy the more detailed transfer pricing documentation requirements (particularly as set out in Subdivision 284-E of Schedule 1 to the Taxation Administration Act 1953, as overlaid by ATO guidance in Taxation Ruling TR 2014/8) – if they are to have a documented transfer pricing position.

This will typically involve a degree of benchmarking and the preparation of more fulsome documentation substantiating the rationale for the arrangements, particularly in the light of the earlier Chevron decision.

For more information regarding the content in this article, please contact your local RSM office.