A reasonably arguable position – a so-called ‘RAP’ – is essential to protect you from penalties and interest for incorrect transfer pricing.
TP Reasonably Arguable Position
In total you will have four episodes about transfer pricing for now – episodes 384, 385, this episode 392 and then also 393.
Ep 384 was about the general concept of transfer pricing. Why it is an issue and how you can play it safe.
In ep 385 we spoke about the simplified transfer pricing recording keeping that can save you a lot of time and hence money if you qualify.
In this episode 392, Benedicte Olrik of Andersen Australia will discuss your transfer pricing reasonably arguable position. You need one whenever you do anything with an affiliate overseas.
And ep 393 will go through all outstanding questions about transfer pricing.
Here is what we learned in this episode about RAPs but please listen in as Benedicte explains all this much better than we ever could.
To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.
TP Reasonably Arguable Position
Whenever you have cross-border transactions between two related parties, you have a transfer pricing issue. If one of the parties is an Australian tax resident, you need to show the ATO that the transfer price you used to value the cross-border transaction is at arm’s length.
You do this in one of two ways:
# 1 – ‘Contemporaneous’ RAP
Prepare a ‘contemporaneous’ RAP at the time the transaction occurs – well before the ATO raises the issue. Even if the ATO disagrees with your transfer price, your RAP will protect you from penalties and interest.
# 2 – You Go For the Crunch
You bank on not getting audited. If the ATO doesn’t audit you, all good. But if the ATO does come knocking, you will be doing it the hard way. Trying to defend your position and getting hit with penalties and interest if the ATO changes your transfer price.
Your choice. But keep in mind that the ATO is heavily focused on transfer pricing.
ATO Focus
Transfer pricing has the ATO’s attention. When it comes to transfer pricing, the ATO is one of the most advanced and aggressive tax authorities in the world.
Australia’s corporate tax rates of 25% or 30% motivate multinational enterprises (MNEs) to transfer profits out of Australia. And gets the ATO hunting, waving Part IVA as a very effective weapon.
Part IVA
What happens if you do nothing? If you ignore all this?
In short – you face Part IVA. Or in more detail. The transfer pricing legislation – Subdiv 815 (130) ITAA 1997 to be exact – links into Part IVA and s177 CD of the ITAA 1936.
And as you know Part IVA gives the commissioner powers to ‘hypothesise’ a new taxable income. So if the ATO believes that the arm’s length price is different from the transfer price – in other words, if the ATO believes that you obtained a tax benefit – then they can adjust your tax position for the shortage. And add penalties and interest on top.
How does the ATO know where to look? They screen for risks.
Risk Screening
The ATO screens your International Dealings Schedule (‘IDS’) and your tax return for certain risk factors.
Typical risk factors are continuous losses, charges for intellectual property, finance arrangements, and restructuring.
If you hit one of these risk factors, make sure you got a strong RAP.
If your International Related Party Dealings (‘IRPD’) are below the threshold of AUD 2m and so you don’t have to prepare an International Dealings Schedule, then your risk is lower. It isn’t nil, the ATO can still query and change your transfer price, but it is definitely lower.
So do you have to prepare an IDS?
International Dealings Schedule
How do you tell the ATO that you have a transfer pricing scenario? You do this through an international dealing schedule (‘IDS’) – unless you are really big (AUD 1b) and do Country-by-Country Reporting.
Whether you need to prepare an IDS or not, depends on your International Related Party Dealings (‘IRPD’). If those IRPD exceed AUD 2m, you need to prepare an IDS.
IRPDs include loan balances. So if you receive an AUD 2m loan from your parent overseas but otherwise have no dealings with them, you still need to prepare an IDS.
So let’s assume you have to prepare an IDS. That means the ATO can see the type and amounts of your international related-party dealings. That increases your risk of an audit and review. Hence you want to get RAP. Because having a RAP protects you from penalties and interest.
How to Get a RAP
You get a RAP in three steps:
1 – Check eligibility for simplified record keeping
2 – Self-assess your transfer price compliance
3 – Document
Three steps. Doesn’t look that hard, right?
Step # 1 – Check Eligibility for Simplified Record Keeping
The Tax Administration Act lists what your RAP should look like and show.
Subdivision 284-E of Schedule 1 to the Taxation Administration Act 1953 (‘TAA’)
Preparing all this can be tedious and time-consuming.
To help you the ATO has developed Simplified Transfer Pricing Record Keeping (‘STPRK’) rules. We covered the STPRK in episode 385.
Not Qualifying for Simplified Record Keeping
If you don’t qualify for simplified record keeping, then your documentation is all about how you got to your transfer price using one of the five methods which we covered in ep 384. Comparable prices, margins, industry statistics and all that tedious stuff.
Qualifying for Simplified Record Keeping
If you do qualify for simplified record keeping, then you have to document how you qualify for the STPRK.
But you don’t have to document how you get to your actual transfer price, apart from listing the method you used.
So documenting your RAP is a lot easier when you qualify for the STPRK.
Step # 2 – Self-assess Your Tranfser Price
You self-assess your transfer price (‘TP’). You do this using one of the five methods we covered in ep 384.
Subdiv 815-B to 815-E of the Income Tax Assessment Act 1997 and Subdiv 284-E of the Tax Administration Act 1953.
And you – either you alone or with your advisers – have to do this whether you qualify for simplified record keeping or not.
So you still have to assess your compliance with the transfer pricing rules. Whether you qualify for STPRK or not.
Step # 3 – Document
You always have to prepare documentation. The question is what exactly do you have to document? The answer depends on whether you qualify for simplified record-keeping or not.
If you qualify, you document how you qualify. Apart from that you just have to list the method you used.
If you don’t qualify, you document how you got to your transfer price.
Contemporaneous
Documentation is all about being contemporaneous. Yes, we know. An awkward word nobody ever uses, unless they talk about TP documentation.
“Contemporaneous TP documentation is to support your transfer price and shows that the price is at arm’s length.’
Contemporaneous means as you go. You prepare the documentation as the transactions occur. If you don’t prepare documents as you go, you can’t do this later.
So when you receive stock from an overseas affiliate, you don’t document how you got to the transfer price two years later. You do it now.
Without contemporaneous documentation, you can’t have a RAP. So it is not just: No documentation = No RAP.
It is also: Not contemporaneously done = No RAP.
Without a RAP, you have little defence against ATO penalties and interest.
Summary
So document your RAP as you go. Be it that your RAP is about how you qualify for simplified record keeping. Or about how you got to your transfer price and why it is at arm’s length.
Make sure you prepare your RAP as you go. Now, not later.
MORE
Simplified Transfer Pricing Record Keeping
Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.