Australia’s transfer pricing requirements have become more in line with international standards but are still considerably different to other countries. What documentation is required and what are the key differences? Here’s a summary of the Australian rules that affect multinationals in Australia.
What is transfer pricing?
‘Transfer pricing’ refers to the prices that multinational companies set for their related party international transactions. Australian law requires that a ‘transfer price’ must be in accordance with the ‘arm’s length-principle’ and reflect what independent parties would pay for the same or similar good or service.
If multinational companies set their transfer prices too high or too low, they can shift profits to low-tax countries and pay less taxes in Australia. To ensure Australian entities report an appropriate amount of profit, the Australian Tax Office (ATO) requires companies to keep documentation that substantiates their transfer pricing policy. The ATO also requires companies to lodge information about their international dealings with other international group members, together with their income tax return, and enforces high penalties where an entity is not compliant.
Australia has had strict transfer pricing legislation for decades. The current documentation and reporting requirements for an Australian entity are explained briefly below.
Transfer pricing documentation required in Australia
1. Transfer Pricing Manual
Australian entities which are part of international groups are obligated to keep extensive records of their transfer pricing policies. These records, called ‘Transfer Pricing Manuals’, help the ATO understand the companies’ tax positions and assure that profits are recorded correctly.
An Australian Transfer Pricing Manual should at least contain an overview of the group’s organisational structure, its global and Australian business activities and an analysis of the relevant industry in which the group operates, both internationally and in Australia. Most importantly, it needs to contain a benchmarking test of all intercompany transactions in a given financial year. This benchmarking test determines whether the transactions are in accordance with the arm’s length principle. The Manual should also explain how the company meets its compliance obligations under Australian-specific tax legislation.
The Transfer Pricing Manual needs to be in place before the entity lodges its income tax return.
Some smaller Australian companies may opt for simplified transfer pricing record keeping options (STPRK) depending on their type of business and type of related party transactions in a financial year- for example if transactions are simply for items such as intra-group services, low-level inbound and outbound loans, or administration and technical services.
2.International Dealings Schedule (IDS)
Companies with aggregated related party transactions greater than AU$2million are also obligated to complete an International Dealings Schedule (IDS) when lodging the Australian income tax return. This schedule discloses the types and amounts of the related party transactions in a given financial year. It also explains the applied transfer pricing methodology and the level of transfer pricing documentation prepared for the transaction.
3. Additional transfer pricing documentation for Significant Global Entities
Like many countries, Australia has recently adopted Country-by-Country (CbC) Reporting as an additional measure to prevent multinationals shifting their profits to low-tax jurisdictions. However in Australia, CbC-reporting only applies to Significant Global Entities (SGE’s), which are classified as part of a multinational group with a global revenue of AU$1billion or more.
In addition to a Transfer Pricing Manual and International Dealings Schedule, SGEs are required to lodge the following reports in Australia within 12 months after the entity’s financial year end:
- CbC Local File The Local File is drafted for every individual entity in Australia and provides a line by line description of intercompany transactions with other group entities. Its format is unique to Australia and has a completely different set-up compared to other countries’ Local Files. To lower the compliance burden for smaller taxpayers, there are simplifications available. The Local File needs to be drafted and lodged by the Australian entity itself and should be prepared by your Australian accountant.
- CbC Master File The Master File is usually prepared centrally by the global parent entity and contains general information about the group’s organisational structure, its business activities and its financials. It also describes the functions of the individual entities, the assets and intangibles they use and the risks they bear.
- CbC-Report The CbC-report is usually lodged by the global parent entity and includes country-specific information relevant for taxation such as aggregated revenue, profit, paid and Accru Felsersed income taxes, owned assets and number of employees per country. Australia has entered into several international agreements that facilitate the exchange of CbC-Reports with other countries.
Monitoring and assistance
If you’re a multi-national business with an Australian entity, you’ll need to review the transfer pricing reporting and documentation requirements that apply to your Australian entity on a continuing basis, and professional assistance is recommended.
Accru Felsers monitors and prepares transfer pricing documentation for many multi-nationals, especially from Germany, China, Japan and Australia, with a successful record of our clients passing ATO Multinational Anti-Avoidance Law (MAAL) reviews of transfer pricing documentation. Please contact Glenda Nixon or Maggie Chang, our transfer pricing specialists, if you have any questions or would like our assistance.
