Understanding Transfer Pricing Regulations in Australia

Australia’s transfer pricing rules follow the globally accepted principle that ensure international transactions between related parties should be conducted on an arm’s length basis.  

This means prices should be consistent with what independent parties would agree under similar circumstances.

The ATO has been increasingly vigilant in reviewing and auditing transfer pricing positions over the last few years. Foreign owned taxpayers should expect questions relating to their transfer pricing arrangements as a key aspect to an ATO review. The ATO has high expectations regarding transparency of information across multinational groups, and this approach can be unfamiliar to a head office located in another jurisdiction. The transfer pricing rules interact closely with several other provisions, with some of the key areas including thin capitalisation, interest and royalty withholding taxes, hybrid mismatch rules, the Foreign Investment Review Board (FIRB) approval process, Goods and Services Tax (GST), and customs duty.

Australia’s transfer pricing legislation refers to the principles contained within the OECD’s Transfer Pricing Guidelines. These principles apply across OECD countries as well as some non-OECD jurisdictions. Regardless, each jurisdiction will have their own domestic approach to transfer pricing that should be carefully considered.

Given Australia operates under a self-assessment tax regime, businesses must maintain detailed transfer pricing documentation to demonstrate that their transfer pricing practices comply with the arm’s length principle. Failure to comply with the documentation requirement means that penalty protection is not available.

This requires a detailed analysis of several items including: 

• the actual terms and conditions operating in relation to the related party transaction being reviewed, including a functional analysis of the relative contributions by each party.
• the most appropriate transfer pricing methodology applicable.
• the arm’s length conditions applicable to the related party transaction (typically in the form of a benchmarking analysis depending on the method chosen).
• whether a transfer pricing benefit exists based on the actual conditions for the year compared to the arm’s length conditions for the year, including whether any transfer pricing adjustment is required to be included in the income tax return.

While transfer pricing supporting documentation is not submitted to the ATO, most companies (as part of its International Dealings Schedule or IDS) will have to disclose whether transfer documentation is in place. An IDS provides details of an entity’s key international tax risk areas to the ATO, including disclosures on related party transactions such as the nature of the transaction, the dollar value, the methodology being applied, the counterparty jurisdiction, amongst other things.

Australian transfer pricing documentation can be likened to an OECD Local File with several additional statutory requirements. In Australia, this can be mistaken with an Australian Local File which forms part of Australia’s CbC Reporting statements and is only required for taxpayers who are considered a Country-by-Country Reporting Entity (i.e. broadly is part of a multinational group with global income over A$1B). 

The Australian Local File includes detailed intercompany transactional listing to be provided in Part A of the Local File, and also includes Part B and a Short form Local File.

The Australian transfer pricing provisions and documentation requirements apply to all taxpayers with no de-minimis rules applicable.

However, the ATO does acknowledge that preparing documentation that meets all the transfer pricing requirements may impose an administrative burden that is disproportionate to their risk of not complying with the transfer pricing rules. As such, the ATO has developed a series of simplified transfer pricing record keeping options for certain low risk/low materiality type transactions and entities. 

If the ATO determines that the taxpayer’s transfer pricing policies do not comply with the arm’s length principle, it can make adjustments to the taxable income of the business.

Penalties may also be imposed for non-compliance, including material penalties and interest charges.

These penalties increase substantially for entities which are part of a large multinational group and are considered a Significant Global Entity. Australia’s transfer pricing rules are comprehensive and aim to ensure that multinationals pay their fair share of Australian tax. Compliance with these rules requires careful consideration and should be reviewed on an annual basis prior to the filing of the Australian income tax return. Transfer pricing documentation should be prepared to support the position filed with the ATO. Businesses engaging in international transactions with related parties should be proactive in managing their transfer pricing risks to avoid potential adjustments and penalties.

  Key Action Items:  

1. Review and document your transfer pricing as part of your Australian tax compliance each year.
2. Consider whether any simplified documentation options are available.
3. Review and confirm your SGE status each year to ensure you understand the risk of penalties and can address any additional filings that may be required.

FOR MORE INFORMATION

If you require any further information, please speak with Danielle Sherwin or Tristan Hedley.