This Draft Ruling, released Wed 16.4.2014, sets out the Commissioner’s views on the transfer pricing documentation an entity should prepare and keep as required by s 284-255 of Sch 1 to the Taxation Administration Act 1953. Where an entity does not meet these requirements, Div 284 of Sch 1 to the TAA (dealing with administrative penalties) will apply as though a matter were not reasonably arguable.
The Draft Ruling also:
- explains the need for transfer pricing records to address matters that might give rise to a transfer pricing benefit;
- explains the interaction between s 262A of the ITAA 1936 (which deals with the general record keeping requirements) and Subdiv 284-E of Sch 1 to the TAA;
- clarifies the documentation requirements for trusts and partnerships under Subdiv 815-D of the ITAA 1997.
The Draft Ruling applies to dealings where the actual conditions that operate satisfy the cross-border test under s 815-120(3) of the ITAA 1997 (referred to in the Draft Ruling as “relevant dealings”). The ATO says the cross-border test will generally be met where the actual conditions are not purely on a domestic basis. The relevant dealings may apply to entities and entities that operate at or through permanent establishments (PEs).
DATE OF EFFECT: When the final Ruling is issued, it is proposed to apply to income years commencing on or after 29 June 2013 in relation to income tax. In relation to withholding tax, the final Ruling is proposed to apply to income derived, or taken to have derived, in income years commencing on or after 29 June 2013.
COMMENTS are due by 30 May 2014. ATO contact – Frank Cipriano; Tel: (03) 9285 1119; Fax: (03) 9285 1461; Email: firstname.lastname@example.org.
[LTN 73, 16/4/14]
Extract from Sub-div 284-E of Sch 1 to the TAA
284-250 Undocumented transfer pricing treatment not reasonably arguable
This Division has effect in relation to an entity as if a matter was not * reasonably arguable if:
(a) the matter is a particular way of applying (including not applying) Subdivision 815-B or 815-C of the Income Tax Assessment Act 1997 to a matter (or identical matters); and
(b) the entity does not have records that meet the requirements in this Subdivision for the application of the Subdivision mentioned in paragraph (a) to that matter (or those matters) in that way.
Note: For the Commissioner‘s power to remit an administrative penalty imposed by this Part, see section 298-20.
284-255 Documentation requirements
(1) Records kept by an entity meet the requirements in this Subdivision for the application (or non-application) of Subdivision 815-B or 815-C of the Income Tax Assessment Act 1997 to a matter (or identical matters) in a particular way if the records:
(a) are prepared before the time by which the entity lodges its * income tax return for the income year relevant to the matter (or matters); and
(b) are in English, or readily accessible and convertible into English; and
(c) explain the particular way in which the Subdivision applies (or does not apply) to the matter (or matters); and
(d) explain why the application of the Subdivision to the matter (or matters) in that way best achieves the consistency mentioned in section 815-135 or 815-235 of that Act (as the case requires) (about guidance material).
(2) Without limiting subsection (1), the records must allow each of the following to be readily ascertained:
(a) the * arm’s length conditions relevant to the matter (or matters);
(b) the particulars of the method used and comparable circumstances relevant to identifying those arm’s length conditions;
(c) unless the records are for the non-application of the Subdivision to a matter (or matters)–the result that the application of the Subdivision in that particular way, as compared to the non-application of the Subdivision, has for the operation of this Act in relation to the entity;
(d) for Subdivision 815-B–the actual conditions relevant to the matter (or matters);
(e) for Subdivision 815-C:
(i) the actual profits mentioned in paragraph 815-220(1)(a) of that Act and the * arm’s length profits, to the extent that they are relevant to the matter (or matters); and
(ii) the particulars of the activities and circumstances mentioned in subsection 815-225(1) of that Act, to the extent they are relevant to the matter (or matters).