Global transfer pricing guide

Transfer pricing - Australia

01 Jan 202517 min read
This publication provides a high-level overview of Australia’s transfer pricing rules and outlines who to contact for expert guidance in this area.
Contents

Introduction to transfer pricing in Australia

  • Australia’s transfer pricing legislation is contained in Division 815 of the Income Tax Assessment Act 1997 (‘ITAA 1997’) and Subdivision 284-E of the Taxation Administration Act 1953 (‘TAA 1953’). The legislation is intended to be interpreted to achieve consistency with the Organisation for Economic Co-Operation and Development (‘OECD’) Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2017.
  • The transfer pricing rules apply to Australian taxpayers, including Australian branches of overseas companies.
  • Preparation of contemporaneous transfer pricing documentation is recommended but not mandatory. However, transfer pricing documentation may provide taxpayers with access to penalty relief in the event of a transfer pricing adjustment.
  • Effective from income years commencing on or after 1 July 2019, a taxpayer is considered an SGE if it is any of the following:
    • A global parent entity (‘GPE’) with an annual global income of A$1 billion or more; 
    • A member of a group of entities consolidated for accounting purposes as a single group and one of the other group members is a GPE with an annual global income of A$1 billion or more; 
    • A member of a notional listed company group, and one of the other group members is a global parent entity with an annual global income of A$1 billion or more. (A notional listed company group is a group of entities that would be required to be consolidated as a single group for accounting purposes if a member of that group was a listed company. Any exceptions in accounting principles that may permit an entity not to consolidate with other entities are disregarded. An entity is also an SGE if it, or any other member of the actual or notional accounting consolidated group of which the entity is a member, has been given a notice by the Commissioner determining that its GPE would have an annual global income of A$1 billion or more for any period during the income year).
  • Taxpayers who are considered a Significant Global Entity (‘SGE’) may also be considered a Country-by-Country Reporting Entity (‘CbCRE’) and may have Australian Country-by-Country (‘CbC’) reporting obligations.
  • Effective from income years commencing on or after 1 July 2019, a taxpayer is regarded a CbCRE if it is either:
    • a CbC reporting parent which can be a standalone entity whose annual global income is A$1 billion or more, or a member of a CbC reporting group who is not controlled by another entity in the group and has an annual global income of A$1 billion or more; 
    • a member of a CbC reporting group, and one of the other group members is a CbC reporting parent.
  • Effective for income years commencing on or after 1 July 2023, taxpayers are required to apply the transfer pricing provisions to support the quantum of debt borrowed from overseas lenders is consistent with arm’s length conditions before applying Australia’s thin capitalisation rules.   
  • The OECD Guidelines have been legislated as part of Australia’s current transfer pricing rules and have been effective since the first income year commencing on or after 29 June 2013.
  • Australia’s transfer pricing legislation has been revised to specify that it is to be interpreted to achieve consistency with the OECD Guidelines updated on 20 January 2022.
  • Australia applies the ‘most appropriate method approach’ for the selection of transfer pricing method(s). The Australian Tax Office (‘ATO’) prefers selection to be performed on a transaction by transaction basis.
  • Acceptable transfer pricing methods include comparable uncontrolled price, resale price, cost plus, transactional net margin and profit split. Other methods can also be used if justifiable and appropriate.
  • The Australian transfer pricing law is governed on a self-assessment basis and requires the taxpayer to maintain records evidencing the application of the transfer pricing principles i.e., arm’s length nature of the taxpayer’s cross-border transactions.
  • The preparation of transfer pricing documentation is recommended but not mandatory.
  • Taxpayers with aggregate amounts of international related party dealings greater than A$2 million need to disclose the details of their related party transactions in the Local File and Section A of the International Dealings Schedule attached with their annual income tax return.
  • In the Local File and the International Dealings Schedule, taxpayers disclose the following details about their international related party dealings: type of transaction, magnitude of transaction, and level of transfer pricing documentation to support to the arm’s length nature of the transactions.
  • The more significant and the broader the scope of a taxpayer’s international related dealings, the more likely the ATO is to review those dealings. Taxpayers with significant level of dealings whose tax performance is low compared to industry standards are at the greatest risk of review.
  • The ATO has recently published several transfer pricing Practical Compliance Guidelines which allows taxpayers to perform a self-assessment to understand the ATO’s perception of the risks associated with specific transfer pricing positions adopted.

Transfer pricing documentation

  • The preparation of Australian transfer pricing documentation is recommended to reduce the risk of an ATO audit and to assist taxpayers explain their position and to minimise penalties in the event of an audit adjustment.
  • Australian transfer pricing documentation should be prepared according to Taxation Ruling 2014/8 Income Tax: transfer pricing documentation and Subdivision 284-E of the Income Tax Assessment Act 1997 which require an entity to identify the arm’s length conditions so as best to achieve consistency with the OECD Guidelines.
  • Australian transfer pricing documentation should include: a background to the company, a functional analysis of the company which describe the key functions, assets and risks of the company, an outline of the key intercompany transactions under analysis, an industry analysis and an economic analysis which assesses the arm’s length nature of intercompany dealings.
  • Australian transfer pricing documentation should be prepared by the due date for filing the annual income tax return and needs to be in English.
  • Australia’s CbC reporting requirements are legislated under Subdivision 815-E of the Income Tax Assessment Act 1997.
  • The CbC reporting implements Action 13 of the OECD’s Base Erosion and Profit Shifting (‘BEPS’) action plan.
  • For income years commencing on or after 1 January 2016, taxpayers who are subject to CbC reporting are required to lodge the following statements with the ATO: CbC report, master file and Australian local file.
  • Australia’s CbC report and master file reporting requirements are consistent with Annex I and Annex III of Chapter V of the 2017 OECD Guidelines.
  • The ATO has implemented its own Australian Local File reporting requirements which is inconsistent with Annex II of Chapter V of the 2017 OECD Guidelines. The ATO has revised the disclosure requirements effective for income years commencing on or after 1 January 2024. The new requirements include expanded disclosures relating to business descriptions, employee organisational structures and restructuring events.  
  • Australia’s Public CbC reporting requirements are legislated under the Taxation Administration Act 1953.
  • Rules apply for income years commencing on or after 1 July 2024 with a due date of 12 months after the end of the relevant income year.
  • The reporting requirements are closely aligned with the Global Reporting Initiative 207 requirements.
  • Information to be disclosed includes revenue from related and third parties, profit or loss before income tax, book value of tangible assets, income tax paid and accrued, description of the group’s approach to tax and description of main business activities.
  • Information is to be disclosed for Australia and aggregated for rest of world. However, the 40 jurisdictions the Government has identified as facilitators of profit shifting activities must be disclosed separately, including Hong Kong, Singapore, and Switzerland.
  • The ATO will publish the report on an Australian Government website which is accessible by the public. 
  • Risk factors include international related party dealings with entities located in jurisdictions classified as ‘specified countries.’ These jurisdictions typically are low tax jurisdictions or tax havens.
  • The Australian Government implemented the Multinational Anti-Avoidance Law (‘MAAL’) provisions which came into effect from 1 January 2016. MAAL applies to SGEs where if under a scheme or in connection with a scheme:
    • a foreign entity supplies goods or services to an Australian customer;
    • an Australian entity, that is an associate of or is commercially dependent on the foreign entity, undertakes activities directly in connection with the supply;
    • some or all of the income derived by the foreign entity is not attributable to an Australian permanent establishment, and
    • the principal purpose, or one of the principal purposes of the scheme, is to obtain an Australian tax benefit or to obtain both an Australian and foreign tax benefit.
  • The Australian Government also introduced the Diverted Profits Tax which only applies to SGEs. Divert Profits Tax applies where taxpayers who, under a scheme or in connection with a scheme:
    • a taxpayer ('the relevant taxpayer') has obtained a tax benefit;
    • the principal purpose, or one of the principal purposes, of a person who entered into or carried out the scheme, was to enable the relevant taxpayer to obtain an Australian tax benefit or to obtain both an Australian and foreign tax benefit;
    • a foreign associate of the relevant taxpayer is involved in entering into or carrying out the scheme or is otherwise connected with the scheme, and
    • none of the Diverted Profits Tax exceptions apply.
  • The ATO has increased their focus on inbound related party financing arrangements and raised concerns on the funding practices and taxpayer behaviours, including the following:
    • financing arrangements not conducted using terms and conditions expected between independent parties;
    • no or limited equity contributed by the investor resulting in excessive related party debt amounts;
    • use of interest rates that do not reflect market conditions or raise viability concerns;
    • deferring interest payments to avoid withholding tax;
    • insufficient documentation to support the transfer pricing positions taken, including interest rates applied and quantum of debt, and
    • related party loans not repaid or refinanced when practical and better funding opportunities arise. 
  • The ATO has also increased their focus on intangibles. High risk areas include the following:
    • taxpayers that have migrated intangible assets;
    • have group entities that own intangible assets offshore that do not have staff qualified to manage, perform or control the DEMPE activities, and
    • taxpayers that have mischaracterised or undervalued royalty payments.
  • Taxpayers are subject to a failure to lodge on time penalty. As of 1 July 2017, SGEs are subject to an increased failure to lodge on time penalty which is the base penalty amount multiplied by five hundred. The SGE penalty rates from 7 November 2024 are as follows:
    • $165,000 for 28 days or less late;
    • $330,000 for 29 days to 56 days late;
    • $495,000 for 57 days to 84 days late;
    • $660,000 for 85 to 112 days late;
    • $825,000 for more than 112 days late.
  • For any transfer pricing adjustment made by the ATO, a penalty rate of up to 50% of any tax avoided may apply.
  • The ATO may apply impose administrative statement penalties for certain conduct. As of 1 July 2017, SGEs are subject to twice the penalty amount that applies to all other taxpayers. These penalties for SGEs include:
    • 50%, 100% or 150% of shortfall amount for making a false or misleading statement;
    • 50% of shortfall amount for making a statement which treats a law as applying in a way that is not reasonably arguable;
    • 150% of tax-related liability for failing to provide a document as required.

Economic analysis and how to demonstrate an arm’s length result

  • The ATO’s preference is that local comparable companies are selected. However, the ATO may accept non-Australian based comparable companies where the taxpayer can demonstrate that they have searched for, but could not identify, sufficient Australian based companies.
  • The ATO will move a taxpayer’s transfer pricing position to the median of the arm’s length range constructed by comparable companies based on their guidance on quantifying uncertain transfer pricing positions adopted by taxpayers.

Advance Pricing Agreements (APAs), dispute avoidance and resolution

  • APAs allows taxpayers to reach an agreement with the ATO on the future application of the arm’s length principles to intercompany dealings with international related parties.
  • APAs provides a mechanism for managing and mitigating transfer pricing risk by providing a greater certainty on a prospective basis.
  • Where taxpayers obtain an APA and continue to meet its requirements, the ATO will not impose any additional income tax to the agreed payable based on the pricing worked out under the APA on the covered cross border dealings.
  • APA generally covers a period of five years and may be reviewed if trading circumstances materially change. APAs are also subject to an annual reporting requirement.
  • Australia has an extensive treaty network and the Mutual Agreement Procedure (‘MAP’) will often be available when double taxation occurs.

Exemptions

  • The ATO has provided a list of exemptions for CbC reporting requirements. Taxpayers eligible for such exemptions will be exempt from lodging one or more CbC reporting statements. Effective from 1 January 2025, the ATO has implemented stricter criteria for granting exemptions. Exemptions for Australian Local Files are all but gone and exemptions for Master Files will only be provided in limited circumstances.
  • Taxpayers who elect to lodge Part A of the Australian Local File at the same time as their income tax return will not need to complete Questions 2 to 17 of the IDS under the ATO’s administrative solution.
  • Taxpayer’s who are eligible to apply the ATO’s Practical Compliance Guideline 2017/2 Simplified transfer pricing record-keep options (‘PCG 2017/2’), do not need to prepare contemporaneous transfer pricing documentation for certain transactions. ATO will generally not allocate compliance resources to review transactions that meet the criteria under PCG 2017/2, beyond reviewing the taxpayer’s eligibility to apply PCG 2017/2.
  • Australia’s Public Country-by-Country reporting rules apply to Country-by-Country Reporting Entities for income years commencing on or after 1 July 2024. However, multinational groups with less than AUD 10 million of aggregated Australian source income will not be subject to these rules. 

Related developments

  • The ATO’s Combined (income tax and GST) Assurance program replaced the previous Top 1,000 tax performance program and the Top 1,000 GST assurance program.
  • The program reviews public and multinational groups with annual turnover above $350 million to obtain greater assurance that large public and multinational economic groups are reporting the right amount of income tax and GST or identify areas of tax risk for further action. At the end of the ATO’s review, the ATO considers whether there is enough evidence to conclude that the taxpayer has paid the right amount of tax or whether further comprehensive reviews are required.
  • The program had shown that transfer pricing continues to be one of the main areas of contention. The common transfer pricing issues arising include:
    • Structuring and pricing of related party financing transactions are inconsistent with third party transactions and arrangements structured to avoid interest withholding tax.
    • Whether sufficient benefits are being received by Australian operations to justify the payments of licence fees and royalties to international related parties.
    • Insufficient documentation prepared on the functions performed, assets used and risks assumed for DEMPE related activities and licensed assets.
    • Arrangement for inbound and outbound supplies of goods which are considered high risk based on the ATO’s Practical Compliance Guidelines (refer to the section below). 
  • The ATO has released several transfer pricing related Practical Compliance Guidelines. These guidelines provide a self-assessment framework for taxpayers to assess their risk rating to understand the ATO’s initial perspective on particular transfer pricing issues. The higher the risk rating, the more likely the ATO will review the taxpayer’s arrangement.
  • The Practical Compliance Guidelines allows taxpayers to make relevant changes to their transfer pricing arrangements to improve their risk rating if necessary.
  • The self-assessment is voluntary, however, the ATO may ask taxpayers whether they have assessed their risking rating and what the rating is.
  • Relevant transfer pricing Practical Compliance Guidelines include:
    • Practical Compliance Guidelines PCG 2017/1 – ATO compliance approach to transfer pricing issues related to centralised operating models involving procurement, marketing, sales, and distribution functions;
    • Practical Compliance Guideline 2017/2 – Simplified transfer pricing record-keep options;
    • Practical Compliance Guideline 2017/4 – ATO compliance approach to taxation issues associated with cross-border related party financing arrangements and related transactions;
    • Practical Compliance Guideline 2019/1 – Transfer pricing issues related to inbound distribution agreements;
    • Practical Compliance Guideline 2021/5 – Transfer pricing issues related to hybrid mismatch rules (mismatches on account of arrangements between deductions and/or non-inclusions of payment between jurisdictions);
    • Practical Compliance Guideline 2024/1 – Intangible migration arrangements;
    • Practical Compliance Guideline 2024/D3 – Restructures and the thin capitalisation and debt deduction creation rules - ATO compliance approach.
  • The ATO expects that tax risk management should be a part of good corporate governance, particularly for large and complex corporations. The presence and testing of a tax internal control framework are an integral part of the risk-assessment protocols used by the ATO.
  • When appropriate, the ATO may assess the tax governance process of taxpayers.
  • The ATO’s Top 1,000 Combined (income tax and GST) Assurance program includes conducting a review of taxpayer’s tax risk management and governance frameworks.
  • The following are some significant Australian transfer pricing related court decisions since 2008:
    • Roche Products Pty Ltd (Roche) v. Commissioner of Taxation [2008] AATA 261 and Commissioner of Taxation v. SNF (Australia) Pty Ltd [2011] FCAFC 74 – These cases highlighted a number of shortcomings of the previous transfer pricing legislation under Division 13 (for example, ATO’s scope was limited to considering whether the pricing of a related-party transaction was at arm’s length and no ability to consider whether the profits or other commercial context of the arrangement were also at arm’s length). These cases led to the introduction of Division 815 which replaced the previous transfer pricing legislation under Division 13.
    • Chevron Australia Holdings Pty Ltd v. Commissioner of Taxation [2017] FCAFC 62 – This case addressed the transfer pricing issue arising out of inter-company financing arrangements. The key takeaway was that when pricing inter-company loans, the relevant subsidiary is to be seen as part of the wider international group and is not to be viewed as a stand-alone entity.
    • Glencore Investment Pty Ltd v. Commissioner of Taxation of the Commonwealth of Australia [2019] FCA 1432 – This case dealt with the construction and application of the transfer pricing provisions contained in Division 13 and Subdivision 815-A. The court relied on the expert market evidence submitted by the taxpayer in support of its pricing arrangement and assessed the degree of ATO’s authority to supersede the taxpayer’s actual agreement with an alternate approach as part of the arm’s length analysis. The court upheld that any reconstruction should be limited to exceptional circumstances referring to commentary in the OECD Guidelines and accordingly, disallowed “impermissibly restructuring the contract”.
    • Singapore Telecom Australia Investments Pty Ltd v Commissioner of Taxation [2024] FCAFC 29 – This case focused on the appropriate pricing of inter-company financing arrangements. The court’s decision was that a borrowing entity is not to be viewed as a standalone entity for financing transactions and that an independent party would have obtained a guarantee from its parent in similar instances. The Full Federal Court dismissed the taxpayer’s appeal against the Federal Court’s initial decision. The High Court also refused to grant the taxpayer special leave to appeal the Full Federal Court’s decision. 
    • PepsiCo, Inc v Commissioner of Taxation [2024] FCAFC 86 – This case focused on the notion of ‘embedded royalty’. The issue decided by the court was whether the tangible property acquired by the Australian taxpayer from an overseas supplier were in part ‘consideration for’ the right to use intellectual property. The Full Federal Court determined the payments made by the taxpayer were solely for the purchase of tangible property and no royalties were embedded within the payments. The High Court has granted the Commissioner special leave to appeal the Full Federal Court’s decision.  

Contact us

For further information on transfer pricing in Australia please contact:

Jason Casas

T- +61 3 8663 6433

E- jason.casas@au.gt.com

 

Christine Cornish  

T- +61 2 8297 2419

E- Christine.cornish@au.gt.com

 

Rashtin Fazal  

T- +61 38663 6138

E- rashtin.fazal@au.gt.com

 

Keith To

T- +61 38663 6103

E-keith.to@au.gt.com

                                               

                                                       

 

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