Australia's transfer pricing regime is an integrity measure designed to protect Australian tax revenue against profit-shifting from an Australian taxpayer to a related party in a foreign country. The measures, contained in Division 13 of Part III of the ITAA36, apply an 'arm's length' test to a resident taxpayer's transactions with non-resident related parties.
The provisions are triggered where an amount of assessable income is less than or where a deduction is higher than what would be expected to arise if the transaction was conducted on arm's length terms. In such cases, the Commissioner has the statutory power to increase the assessable income or decrease the allowable deduction so that the amount reflects an arm's length amount.
The purpose of Australia’s transfer pricing rules is to counter the underpayment of Australian tax by requiring businesses to price related party international dealings according to what truly independent parties acting independently would reasonably be expected to have done in the same situation.
Pricing for international dealings between related parties should reflect a fair return for the activities carried out in Australia, the Australian assets used (whether sold, lent or licensed), and the risks assumed in carrying out these activities. Pricing that is not in accordance with Australia’s transfer pricing rules is often referred to as ‘international profit shifting’.
You should carefully consider the terms and conditions of any international dealings with related parties to ensure your business properly allocates income and expenses between Australia and other countries for tax purposes.
Methods of setting prices and reviewing the outcome of international transactions with related parties are recognised internationally using the arm’s length principle, and Australia has adopted these in taxation rulings to help businesses understand what is expected of them.
DOCUMENTATION REQUIREMENTS
There are sound practical reasons why you should adequately document compliance with the arm’s length principle, namely:
- to reduce the risk of audit by, and dispute with, the Tax Office, and
- to help explain your position to the Tax Office.
From a commercial perspective, the improved corporate knowledge gained from examining functions, assets and risks can provide an insight into the things that really add value to your business.
Schedule 25A
Businesses that engage in international dealings with related parties during an income year are required to complete a Schedule 25A and lodge it with their income tax return. There are a number of questions in Schedule 25A relating to the level of documentation held by a business about selecting and applying an arm’s length methodology.
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