Transfer Pricing – hiding your head in the sand is no longer an option!

calculatorIn December 2014, the Australian Taxation Office (“ATO”) finalised its guidance in relation to transfer pricing documentation and penalties.

This guidance articulates the ATO’s views on the interpretation and practical application of the legislation regarding the key concepts in the new law relating to preparation of transfer pricing documentation and penalties as they apply to Australian and foreign multinationals with years beginning on or after 29 June 2013.

Documentation

The guidance recommends that “five key questions” are considered in preparing transfer pricing documentation, being:

  1. What are the actual conditions that are relevant to the matter (or matters)?
  2. What are the comparable circumstances relevant to identifying the arm’s length conditions?
  3. What are the particulars of the methods used to identify the arm’s length conditions?
  4. What are the arm’s length conditions and is/was the transfer pricing treatment appropriate?
  5. Have any material changes and updates been identified and documented?

One area where the Australian rules extend beyond those of the OECD is the question of whether the transaction or arrangement itself is arm’s length in nature. This “reconstruction” issue is unique to Australia and would not typically be addressed in other OECD-based transfer pricing documentation.

Reasonably arguable position

The guidance strongly reinforces the requirement to satisfy the self-assessment regime and highlights that documentation that is not prepared prior to lodgment of a tax return will not be considered to be contemporaneous and therefore will not entitle the taxpayer to assert that it has a ‘reasonably arguable position’ (“RAP”).

Penalties

The ATO penalty guidance confirms that taxpayers who do not prepare contemporaneous documentation will be unable to argue that they have a RAP. Generally, the compliance penalty that applies where a taxpayer does not have a RAP is 25% of the tax shortfall. Where the taxpayer has prepared contemporaneous documentation but still suffers a transfer pricing adjustment, the compliance penalty is reduced to 10% of the tax shortfall, where the taxpayer can demonstrate that it has a RAP.

While the preparation of transfer pricing documentation is not mandatory under the transfer pricing rules, taxpayers are required to keep tax records that support their tax filing positions: this specifically includes transfer pricing records. The taxpayer can only argue that they have a RAP on a transfer pricing matter if the taxpayer has prepared contemporaneous transfer pricing documentation.

Simplified record-keeping

The ATO has provided certain eligibility criteria so that taxpayers can elect to apply simplified transfer pricing documentation rules in Australia. Where taxpayers meet the eligibility criteria and elect to apply the simplified transfer pricing documentation rules, the election will effectively provide a safe harbour from ATO scrutiny.

Taxpayers should confirm whether they qualify for these “safe harbours” before they commit to preparing full documentation reports. However, the safe harbours do have limited application and may not be available to many taxpayers.

Our Observations

It is clear that the compliance obligations on taxpayers have increased significantly under the new rules. Taxpayers need to be aware that transfer pricing analysis and documentation is no longer an optional extra.

The ATO is very clear that, under self-assessment, taxpayers must:

  • Exercise prudence in completing their International Dealings Schedule;
  • Analyse their transfer pricing position in advance of preparing and filing their return;
  • Prepare Australia-specific transfer pricing documentation before filing their return to evidence compliance and obtain penalty protection; and
  • Develop internal pricing policies to manage their annual transfer pricing obligations.

In the absence of proactive transfer pricing risk management processes, the ATO will consider the taxpayer to have a greater risk and this is likely to result in considerably more scrutiny of the taxpayer by the ATO.

For assistance with analysing your transfer pricing position and preparing complying documentation, please contact our Director of Taxation Services Paul Glover.

Are you an importer or exporter with more than 50 transactions each year?

Empty road and containers in harbor at sunset

Import and/or export trade reviews

In today’s financial environment, cost minimisation is a key driver in the logistical cost structure of each good’s cost of goods calculation. Costs associated with the importation of goods are variable, not fixed. It is therefore essential that such variable costs are minimised. Additionally, administrative penalties arising from compliance errors (e.g. Australian Border Force (ABF) – previously Customs, Department of Agriculture and the ATO) can impact on product costs long after the relevant goods have been imported and on-sold.

The Prosperity Advisers customs and trade review service offering, in conjunction with Trade Consultants, is relevant for any importer or exporter with more than 50 transactions each year. Whether you pay import duty or not, cost and charge savings are able to be identified when there are sufficient transactions each year.

We can help your business save on cross border regulatory costs, customs duty and other related taxes, identify and mitigate risks, and develop a compliance framework for the future.

Our approach

We use a multi-phased approach to border compliance. You can achieve significant cost savings with limited input.

Phase One – To determine whether there are sufficient opportunities to proceed to our savings and risk review, we typically undertake a high level review so we can quickly identify potential target areas for a more detailed savings and risk review. This involves only a visual examination of a previous import/export activity period (up to four years) and reporting back to you on what we see.

Phase Two – Once it is determined that a detailed savings and risk review is warranted, we analyse the data that you (or your customs broker) have declared to the ABF at the time of import or export over the previous four years. We typically review all the key factors that affect the customs duty and GST payments made by your business, including:

  • Tariff classification of your imported or exported goods
  • Use of import customs duty concessions (e.g. TCOs or the Enhanced Project By-law Scheme)
  • Use of export incentives and concessions (e.g. duty drawback or Tradex schemes)
  • Customs valuation, particularly for multinational companies and branded goods
  • The correct identification of the country of origin and use of preferences including Free Trade Agreements
  • Purchase and/or sales contracts

Phase Three – We review your purchase/order cycle, including relevant purchase orders and documentation relating to the physical receipt of goods into store. From such a review, we are better able to provide you with systems improvement advice.

Recent results

For a client in the furnishing industry, more than AU$184,000 was identified in overpaid GST plus more than AU$25,000 in overpaid customs duty. Demurrage charges and excess freight
charges were also identified requiring amended systems controls.

For another importer in the trucking spare parts and components industry, more than AU$1 million in overpaid GST was identified plus AU$15,000 in overpaid customs duty. Demurrage charges and excess freight charges were also identified requiring amended systems controls. Significant savings from using a different supply chain function are
currently being negotiated.

Another client was found to be using more than thirty different customs brokers to make binding declarations to Customs. Over 30% of the client’s importations did not gain release from Customs and Agriculture within a normal processing time, potentially incurring material additional storage charges. The client had insufficient documentation available at the time of clearance to allow proper declarations to be made. It purchased over 30% of its importations from related overseas companies, none of which were declared to Customs as
related, thereby potentially exposing it to multiple repetitive penalties. The client was unaware of any of these exposures to administrative penalties and imbedded costs.

Fees

We are offering “Phase one” at no cost. It is simple to commence “Phase one” – you will only need to provide us with a signed letter of authorisation to the ABF for us to start our review.

Before undertaking “Phase two” and “Phase three”, we will provide and agree a fee quote with you.

Contact your adviser for more information.