Tax Update on International Related Party Dealings
Australia's 'New' Transfer Pricing Laws
The Tax Laws Amendment (Cross Border Transfer Pricing) Bill (No. 1) 2012 (the Bill) passed through Parliament in August 2012. The Bill amends and updates Australia's transfer pricing legislation. The new rules inserted into Division 815 of the Income Tax Assessment Act 1997 complement the existing rules in Division 13 of the 1936 Act.
Transfer pricing rules attempt to stop a tax benefit arising from international profit shifting through the provision of goods or services between international related parties at a price that is other than arm's length.
The explanatory memorandum to the Bill confirms the purpose of the new rules as:
"Subdivision 815-A is designed to make certain two aspects of the operation of Australia's transfer pricing rules:
|•||to ensure that the transfer pricing articles contained in Australia's tax treaties are able to be applied independently of Division 13 through explicit incorporation into the ITAA 1997; and|
|•||To require the arm's length principle to be interpreted as consistently as possible with relevant OECD guidance."|
The Government has controversially advised the 'new' rules have retrospective application back to 1 July 2004.
While businesses may need to revisit past transactions to determine if they comply, businesses will need to be especially mindful of the new rules going forward including:
- Consider whether assets or services are being transferred at other then an arm's length price (especially relevant if businesses are running at a loss, or have a low profit margin)
- Ensuring any cross border financing is reviewed to determine if an arm's length interest rate has been applied and loans and rates are documented
The key issue with transfer pricing is having the correct documentation. Transactions between international related parties should have contemporaneous documentation which among other things records the nature of the transactions, document what an arm's length price is for the goods or services supplied and discuss why the method of calculating the arm's length price was chosen. The documentation is required to go much further than a simple agreement recording the basic facts.
The larger the organisation and size of the transaction, the more onerous the documentation process.
If you are unsure whether you have adequate documentation for your international related party dealings, please contact us.
New International Disclosure Requirements – International Dealings Schedule
The International Dealings Schedule replaces the Schedule 25A and other ATO schedules when lodging an income tax return (for the 2012 year onwards). The schedule is required to be lodged when certain questions are answered on the income tax return.
Broadly, if a business has international dealings with related parties (including loans) of an aggregate value of more than $2 Million, then a schedule is required to be completed.
The schedule (which is 12 pages long) goes into more detail than the schedule 25A.
Part A of the schedule pertains to international related party dealings and continues to request details such as the transactions undertaken, the transfer pricing methods selected and the percentage of transactions supported by documentation.
Part B of the schedule queries financing arrangements between related parties and looks at the debt/equity distinction and whether the Tax of Financial Arrangements (TOFA) rules apply.
Part C of the schedule asks about interests in foreign entities such as controlled foreign companies (CFCs), foreign branches, foreign trusts and partnerships.
Part D requires disclosure of Thin Capitalisation information (previously required on a separate form). Thin Capitalisation refers to the level of gearing a company has and the rules seek to reduce interest deductions if companies with international exposure are too highly geared.
Finally, Part E of the schedule asks questions of Financial Service Entities, so will only apply to a limited range of taxpayers.
The ATO have recognised that international transactions will be a growing part of the Australian tax landscape and are taking steps to record as much data as possible to assist with future compliance action.
Unfortunately, for the Australian business public, this requires more disclosure by taxpayers and leads to increased costs of compliance whenever international transactions are involved.
Should you have any questions in relation to the new transfer pricing rules, or the International Dealings Schedule and how they may apply to your business, please contact Jamie Towers or your usual Hanrick Curran advisor on 07 3218 3900.
For a pdf version of this tax update please click here.