Australia’s transfer pricing laws comply with the Guidelines set by the Organization for Economic Co-operation and Development (OECD). They are incorporated within the Income Tax Assessment Act 1997 (ITAA 1997).
Arm’s Length Principle
The arm’s length principle in Australia requires that transactions between related parties (or even unrelated ones in certain cases) be priced as if they were between independent entities acting under normal market conditions. In Australia, this principle applies to both treaty and non-treaty cases and is aligned with the OECD’s Transfer Pricing Guidelines.
When related parties transact under conditions that would not exist between independent entities resulting in a transfer pricing benefit the tax outcome must be adjusted. This is done either by the taxpayer through self-assessment or by the Commissioner. If the actual arrangements are too far from what independent parties would have agreed to, the Commissioner has the power to reconstruct the transaction based on a hypothetical set of conditions that reflect an arm’s length scenario. This principle also applies to permanent establishments, where income and expenses are attributed as if the different parts of the entity were separate and dealing at arm’s length. A seven-year limitation period applies for making such adjustments.
Related Party Definition
Australia does not have a definition for “related parties” in its transfer pricing laws but instead has rules that apply when a tax benefit is gained from cross-border transactions that are not at arm’s length which may or may not involve related parties. Also, there are no set ownership or control thresholds. However, the term “international related parties” is defined in the Australia Tax Office’s (ATO) International Dealings Schedule (IDS) which taxpayers with certain international transactions must fill out. According to the IDS which includes entities and individuals overseas that play a role in, or are influenced by, the management, control, or capital of the taxpayer, and also the taxpayer plays a role in, or is influenced by, the management, control, or capital of that entity or individual.
Transfer Pricing Methods
The selection of the TP method in Australia is conducted based on the most appropriate or best-suited principle. To do so several factors are considered, including the nature of activities involved, availability and quality of the data, similarity between related and unrelated transactions, and any assumptions made. Some common methods they use are comparing prices with independent deals, adding a profit margin to costs, or checking resale prices. Other methods include split profits or net margins.
Comparability Analysis
Australia follows detailed rules for comparing transactions in transfer pricing, considering factors such as the roles of the companies, what is being exchanged, contracts, economic conditions, and business strategies. The tax office prefers using local Australian data when possible because it usually matches better. They do not use secret data for assessments. The law allows using a range of statistical tools to decide fair prices. While adjustments for differences are not strictly required, they should be made when important differences exist to make comparisons fair.
Documentation Requirements
Transfer pricing documentation requirements in Australia are based on the three-tiered approach set forth by the OECD. This requires multinational groups to:
- Master File;
- Local File, and
- Country-by-Country (CbC) report.
These documents are not mandatory for all taxpayers, but preparing them helps demonstrate a “reasonably arguable position,” which can reduce potential penalties. The master file provides an overview of the multinational group’s global operations, structure, use of intangible assets, and intercompany financial activities. The local file focuses on the Australian entity’s specific activities, including its business strategy, local financial results, cross-border related-party transactions, and details of any restructuring or transfers of intangibles. Both the master file and local file must be lodged electronically within 12 months of the end of the income year.
Country by Country Reporting
The CbC report is a requirement for entities within a large multinational group that has a global income of AUD 1 billion or more. It includes key info on which countries the group does business in, where it earns its revenue and pays taxes. Also, from July 1, 2024, it was noticed an expansion of the public CbC reporting rules to groups that generate at least AUD 10 million in income from Australia. While some exclusions may apply, failure to put together and report the required information may result in large penalties. The report must be filed within 12 months after the close of the income year to which it relates.
Advance Pricing Agreements (APA) and Mutual Agreement Program (MAP)
An Advance Pricing Arrangement (APA) is an agreement between a taxpayer and the tax authority that sets out how transfer pricing will be done for future cross-border transactions. APAs help avoid disputes and double taxation.
There are three types of APAs:
- Unilateral APA: between the taxpayer and the ATO only.
- Bilateral APA: involves the ATO and one other country’s tax authority.
- Multilateral APA: involves the ATO and two or more other countries’ tax authorities.
The APA process has three stages: early engagement, formal application, and monitoring compliance. Bilateral and multilateral APAs require agreement between tax authorities, not just the taxpayer.
Mutual Agreement Program (MAP)
The Australian Dispute Resolution Profile explains how tax treaty disputes can be resolved through the MAP procedure. Taxpayers can submit MAP requests to the ATO in Brisbane. MAP is available for both transfer pricing and non-transfer pricing issues, including cases involving anti-abuse rules and situations where a settlement has already been reached with the ATO. However, resolving disputes under Australia’s domestic anti-abuse rules through MAP may be limited. The ATO provides training to its staff to ensure tax assessments follow treaty rules and publishes general information to help prevent disputes.
Approach to Transfer Pricing Audits
In 2016, the Australian Taxation Office created the Tax Avoidance Taskforce to assess if big companies and wealthy individuals are paying the right amount of tax, especially on international profits. The ATO uses a system called Justified Trust to review the top 100 and next 1,000 large businesses in Australia, focusing on tax risks like transfer pricing. Based on risk, companies may face more detailed reviews or audits. The goal is to catch tax avoidance and increase compliance.
In Australia, if a taxpayer disagrees with the result of a transfer pricing audit, they can file a written objection to the tax office within 4 years of the assessment. The ATO must respond within 60 days. If they don’t, the taxpayer can demand a decision, and if there’s still no response, the objection is considered denied. The taxpayer must clearly explain why they believe the assessment is wrong. Usually, the ATO gives detailed reasons during audits. If the issue also involves a tax treaty (MAP), the objection process may be put on hold until that is resolved.
Penalties
In Australia, if the tax authority finds that a company has not followed transfer pricing rules, it can charge a penalty based on the tax shortfall. The penalty is usually 25% but can be 10% if the company has a strong and well-documented reason for its pricing. If the company’s main goal was to gain a tax benefit, the penalty goes up to 50%, or 25% if the position was still reasonably arguable. Voluntary disclosure before an audit can reduce the penalty by 80%, or by 20% if done after audit notice. Small businesses may not be penalized if the tax shortfall is under certain limits.
Taxation at a Glance
Australia has three levels of tax: Federal, state, and local. The federal government collects most taxes, including income tax, capital gains tax, Goods and Services Tax (GST), and others like superannuation and excise taxes. States run payroll tax, stamp duty, land tax, and mining royalties. Local governments charge property and service fees.
The currency of Australia is the Australian Dollar. The official name of the Australian tax authority is the Australian Taxation Office.
The table below provides a summary of the main taxation rates related to businesses:
Tax Type | Tax Rate |
Corporate Tax | 30% |
VAT | 10% |
Withholding tax on dividends to non-residents | 30% |
Withholding tax on interest to non-residents | 10% |
Withholding tax on royalties to non-residents | 30% |
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