What is transfer pricing?
Transfer pricing refers to the prices that multinational companies set for their related party international transactions. Australian law requires that prices reflect what independent parties would pay for the same or similar good or service.
Why was transfer pricing introduced?
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. Transfer Pricing rules ensure entities report the appropriate amount of profit.
Who does transfer pricing apply to?
Australian entities that are part of international groups must:
- Keep records that substantiate their transfer pricing policies
- Lodge information about their international dealings with their tax return.
The Australian Taxation Office enforces high penalties where an entity is not compliant.
Transfer Pricing Rules in Australia
There are three main types of documentation required in Australia
- Transfer Pricing Manual
- International Dealings Schedule (IDS) – only needed for companies with aggregated related party transactions greater than AU$2million.
- Country-by-Country (CbC) Reporting – only applies to ‘Significant Global Entities’ (SGEs) who are classified as part of a multinational group withglobal revenue of AU$1billion or more.
Note: Small companies may be eligible for Simplified Transfer Pricing Record Keeping options.
An Australian Transfer Pricing Manual should at a minimum contain:
- An overview of your group’s organisational structure and its global and Australian business activities
- An analysis of the industry your group operates within, both internationally and in Australia.
- A benchmarking test of all intercompany transactions in a financial year.
- Why the company meets its compliance obligations under Australian tax legislation.
An International Dealings Schedule (IDS) should include:
- The types and amounts of the related party transactions in a financial year.
- The methodology and level of transfer pricing documentation for the transaction.
Three Country-by-Country ‘CbC’ documents are required for SGEs:
- A CbC Local file should contain a line-by-line description of intercompany transactions with other group entities. Its format is unique to Australia. It should be drafted and lodged by the Australian entity itself. It’s usually prepared by your Australian accountant.
- A CbC Master Fileshould include information about the group’s organisational structure, business activities and financial and a description of the functions of the individual entities, assets, intangibles and risks.
- A CbC-Report should include country-specific information relevant for taxation such as aggregated revenue, profit, paid and accrued income taxes, owned assets and number of employees per country.
Accru Felsers monitors and prepares transfer pricing documentation for many multi-nationals from Germany, with a successful record of our clients passing ATO Multinational Anti-Avoidance Law (MAAL) reviews of their documentation.
See the full article by Glenda Nixon, international tax partner, on the Accru website blog: Australia’s transfer pricing requirements
Please contact Glenda Nixon firstname.lastname@example.org if you have any questions or would like assistance with transfer pricing.