This Ruling, released on Wed 17.12.2014, sets out the Commissioner’s views on the transfer pricing documentation an entity should have kept in order to meet the requirements of Subdiv 284-E to the Taxation Administration Act 1953.
An undocumented transfer pricing treatment, if ultimately found to be incorrect, is taken to be not reasonably arguable, and penalties could apply.
- The Rulings says the requirements of the Subdivision should be approached with a practical and commercially realistic sense of what entities can reasonably be expected to include in their records.
- In particular, the ATO says the degree of detail and comprehensiveness required is a function of the complexity of the transfer pricing problem involved and the materiality of the risk as measured against the entity’s overall tax position.
- For example, if an entity has controlled buying and selling transactions that are mirrored closely by uncontrolled transactions without any material variation, then the documentation to be kept may be relatively short and simple, reflecting the relatively straightforward nature of the transfer pricing analysis involved.
- By contrast, the Ruling says if a business engages in a controlled transaction that produces a very material transfer pricing benefit, and there is a serious and difficult question as to (for example) the application of the exceptions in s815-130 in the ITAA 1997 [see below], which makes the identification of the arm’s length conditions challenging and controversial, then the “records would need to give considerable attention to this problem”.
The Ruling at Appendix 2 contains a suggested framework for satisfying Subdiv 284-E – It is not part of the binding public ruling. The Ruling was previously issued as Draft TR 2014/D4.
DATE OF EFFECT: The Ruling applies to income years commencing on or after 29 June 2013 in relation to income tax. In relation to withholding tax, it applies to income derived, or taken to have been derived, in income years commencing on or after 29 June 2013. This is consistent with the application of the new transfer pricing rules.
[FJM Note: See also practice statement about penalties for failing to document a transfer pricing issue satisfactorily: PS LS 2014/2 – see summary below under ‘Practice Statements’.]
[LTN 244, 17/12/14]
s815-130 of the ITAA 1997 (the ‘restructuring power’)
Relevance of actual commercial or financial relations
Basic rule
(1) The identification of the * arm’s length conditions must:
(a) be based on the commercial or financial relations in connection with which the actual conditions operate; and
(b) have regard to both the form and substance of those relations.
Exceptions
(2) Despite paragraph (1)(b), disregard the form of the actual commercial or financial relations to the extent (if any) that it is inconsistent with the substance of those relations.
(3) Despite subsection (1), if:
(a) independent entities dealing wholly independently with one another in comparable circumstances would not have entered into the actual commercial or financial relations; and
(b) independent entities dealing wholly independently with one another in comparable circumstances would have entered into other commercial or financial relations; and
(c) those other commercial or financial relations differ in substance from the actual commercial or financial relations;
the identification of the * arm’s length conditions must be based on those other commercial or financial relations.
(4) Despite subsection (1), if independent entities dealing wholly independently with one another in comparable circumstances would not have entered into commercial or financial relations, the identification of the * arm’s length conditions is to be based on that absence of commercial or financial relations.
(5) Subsections 815-125(3) and (4) (about comparability of circumstances) apply for the purposes of this section.