PCG 2017/2 updated – Simplified transfer pricing record keeping options – including $50m in-bound and out-bound loan totals but 7% interest expense and 4% interest income limits

On Wed 25.7.2018, the ATO released an updated version of Practical Compliance Guideline PCG 2017/2, its guidance on simplified transfer pricing record keeping options.

The PCG notes that:

Documenting your transfer pricing to meet all of the requirements of Subdivision 284-E of Schedule 1 to the Taxation Administration Act 1953 (TAA) may impose an administrative burden disproportionate to your risk of not complying with the transfer pricing rules. Simplified transfer pricing record keeping options have been developed to minimise the record-keeping for eligible taxpayers.

PCG 2017/2 provides administrative safe harbours, for 8 types of transactions or activities the ATO believes are low risk in the context of international related party dealings. This Guideline specifies the criteria for taxpayers to self-assess their eligibility for this relief.

1.  Small taxpayers

Your turnover for the year is under $25 million for your Australian economic group, and you:

1. have not made sustained losses
2. do not have related-party dealings with entities in the specified countries
3. have not undergone a restructure within the year
4. do not have related-party dealings involving royalties, licence fees, or research and development arrangements
5. do not have specified service related-party dealings (either as expenses or as income) greater than 15% of your turnover
6. are not a distributor (if you are, refer to the distributors’ section to determine if you are eligible), and
7. have assessed your compliance with the transfer pricing rules.

This option does not reduce the documentation requirements for the following transactions:

• international related-party financial transactions (for example, loans and guarantees) and associated charges, and
• international related-party dealings of a capital nature.

 

2.  Distributors

You are a distributor with turnover under $50 million for your Australian economic group, and you:

• do not have a profit-before-tax ratio of less than 3% [of turnover, presumably];
• you satisfy the other requirements, for reduced documentation, as are set for ‘small business’, above (other than the $25m turnover requirement);and
• the transactions excluded (from reduced documentation) are the same as for ‘small businesses’.

 

3.  Intra-group services

You have international related-party service dealings, and:

• they are either:
  • the value of the services is less than $1m (the deminimus rule); or
  • their value must not be, for services received or given,  more than 15% of expenses, or 15% of total revenue (respectively); and
• you don’t ‘mark-up’ the cost of services by less than 7.5%, for services you receive, or more than 7.5% for services you provide; and
• you satisfy the other requirements, for reduced documentation, as are set for ‘small business’, above (other than the $25m turnover requirement);and
• the transactions excluded (from reduced documentation) are the same as for ‘small businesses’.

 

4.  Low-level inbound loans

You have a combined cross-border loan balance of $50 million or less for your Australian economic group at all times throughout the financial year, and:

• for your inbound loans:
  • your interest rate is no more than the Reserve Bank of Australia (RBA) indicator lending rate for ‘small business; variable; residential-secured term’ (about 7% currently);
  • the funds actually provided to you under the loan are Australian dollar funds and this is reflected in your loan agreements; and
  • your associated expenses are paid in Australian dollars; and
• you satisfy the other requirements, for reduced documentation, as are set for ‘small business’, above (other than the $25m turnover requirement); and
• the transactions excluded (from reduced documentation) are the same as for ‘small businesses’.

 

5.  Materiality

Your total international related-party dealings represent less than or equal to 2.5% of total turnover for your Australian economic group, and you:

• do not have related-party dealings with entities in the specified countries;
• do not have related-party dealings involving royalties, licence fees, or research and development arrangements, and
• have assessed your compliance with the transfer pricing rules.

This option does not reduce the documentation requirements for:

• international related-party dealings of a capital nature.

6.  Management and administration services

Your income from and expenditure on management and administration services must not be more than 50% of the total international related party dealings of your Australian economic group, and you:

• you have a ‘mark-up’ on the cost of relevant services of 5% or less, for services you receive and 5% or more, for services you provide;
• do not have related-party dealings with entities in specified countries; and
• have assessed your compliance with the transfer pricing rules.

This option does not reduce the documentation requirements for the following transactions:

• other international related-party dealings.
• the types of transactions set out, above, for ‘small businesses’.

 

 

7.  Technical services

Your income from and expenditure on technical services must not be more than 50% of the total international related-party dealings of your Australian economic group, and you:

• have a mark-up on costs of the relevant services of 10% or less for services you receive or 10% or more for services you provide;
• do not have related-party dealings with entities in specified countries; and
• have assessed your compliance with the transfer pricing rules.

The transactions excluded from the reduced documentation safe harbour are:

• the same as for ‘Management and administration services’ (above).

 

8.  Low-level outbound loans

You have a combined cross-border loan balance of $50 million or less for your Australian economic group at all times throughout the financial year, and

• for each of your outbound loans:
• your interest rate is no less than than 4.91% for the 2015 income year, 4.37% for the2016 year, 4.34% for the 2017 year, 3.79% for the 2018 year and 3.70% for the 2019 year;
• the funds actually provided by you, under the loan, are Australian dollar funds, and this is reflected in your loan agreement; and
• your associated expenses are paid in Australian dollars; and
• you satisfy the other requirements, for reduced documentation, as are set for ‘small business’, above (other than the $25m turnover requirement).

This option does not reduce the documentation requirements for the following transactions:

• inbound related-party interest-bearing loans and associated charges (see the low-level inbound loans option for eligibility)
• the types of transactions set out, above, for ‘small businesses’.

 

FJM 14.8.18

 

Compression questions (answers available)

1. Is the ‘small business’ turnover threshold $25m?
2. Is the ‘distributor’ turnover threshold $25m?
3. Is the other ‘distributor’ requirement that profit is at least 3% of turnover?
4. For ‘intra-group services’ is there a ‘deminimus’ rule of no more than $25m in the value of those services?
5. Is there another 15% of revenue or services rule, for those intra-group services, both received and given (respectively)?
6. Is there also a 7.5% ‘mark-up’ rule for those same intra-group services?
7. Is the inbound loan threshold $25m?
8. Must the interest paid, be no more than the RBA indicator rate for small businesses (about 7%)?
9. Is the materiality threshold $25m?
10. Is the limit for ‘management and administration services’ $25m?
11. Is the limit for ‘technical services’ $25m?
12. Is the limit for ‘out-bound’ loans $25m?
13. Is the ‘interest rate’ earned limit, the same as the ‘interest rate’ paid limit, the same as for ‘inbound’ loans?