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Simplified transfer pricing record keeping sits in PCG 2017/2.
Simplified Transfer Pricing Record Keeping
The simplified transfer pricing record keeping can save you a lot of time and money. If you qualify, then you just have to document how you qualify, but not how you actually got to your transfer price. Sounds like a small variation in semantics, but can make a big difference.
In this episode, Benedicte Olrik of Andersen Australia will tell you when and how you can use simplified record-keeping. Spoiler alert: There are seven options.
Here is what we learned 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.
Simplified Transfer Pricing Record Keeping
The five methodologies outlined in TR 97/20 (and episode 384) to work out your transfer price are anything but straightforward. And documenting your transfer price using one of these methods is no easy task.
To make this easier the ATO issued simplified transfer price record-keeping guidelines in PCG 2017/2 in 2017. The full title is:
Practical Compliance Guideline PCG 2017/2 ‘Simplified transfer pricing record-keeping options’.
The aim of this PCG is in the words of the ATO to “minimise record-keeping and compliance costs”.
If you and the relevant transaction qualify, then you just have to show how you qualified. But you no longer have to document how you got to the transfer price for that transaction.
Good and Bad News
There are two good news and two bad news for you.
Bad News # 1
Whether you qualify for the simplified record keeping or not doesn’t change that you still need to apply one of the five methodologies. So you still need to understand the five methods and then apply one of them.
Bad News # 2
You still have to document how you qualify for the simplified rules. Yes, that is easier than documenting the actual transfer price, but still tedious paperwork. That’s the bad news.
Good News # 1
If you qualify for the simplified record keeping you don’t have to document the method. You can basically just say ‘Yeah, I did that.” and don’t have to prove and document the method.
Good News # 2
And the second good news is that the criteria for simplified recording keeping are easier to understand than the five methodologies. The criteria are quantifiable. They are about turnover, profit, the volume of related party transactions, that sort of thing.
How to Opt-In
To opt-in to the Simplified Transfer Pricing Record Keeping (STPRK), you notify the ATO via your International Dealings Schedule (IDS) or the relevant Country-by-Country file.
But given that the Country-by-Country filing only kicks in at AUD 1b global turnover, most of us will only deal with the International Dealings Schedule. So you opt into the simplified rules on the International Dealings Schedule – IDS.
The IDS is all about your international related party dealings – also abbreviated to ‘IRPD’. Your IRPD covers anything you do with a related party overseas. Loans, royalties, licence fees, purchase of inventory and so on.
If the total of your IRPD is AUD 2m or more, then you have to prepare an IDS where you outline the amount and nature of all those dealings.
But if your IRPD is below AUD 2m, then you don’t have to do an IDS. You should still document how you qualify for STPRK, but you don’t have to report this in your IDS.
How To Qualify
There are seven eligibility criteria for Simplified Transfer Pricing Record Keeping (STPRK). A transaction only needs to meet one of these to qualify.
None of these seven criteria or options gives you a blank cheque for all transactions. Each is just for specific transactions.
If you qualify for one of the first three – the rules for small businesses, distributors and low materiality – then you only get an exemption for business-as-usual transactions. So for example for the sale of inventory or services.
But you don’t get an exemption for related-party royalties, licence fees, R&D expenditure, loans or capital dealings.
On the other hand, the 4th and 7th criteria – low-value services and technical services – are just for services – low-value or technical.
And criteria 5 and 6 are just for loans.
So you only qualify for the simplified rules one transaction at a time.
You can say that an entity categorically does not qualify for the simplified rules, for example when they have substantial losses or have restructured.
But you can’t say that an entity categorically does qualify – because the exemption is assessed per transaction, not per entity.
So with that let’s go through the seven criteria for the simplified rules. If a transaction qualifies under one of these seven criteria, then you don’t have to document the transfer price for that transaction. You just have to document that the transaction qualifies under that specific criteria.
# 1 – Small Business
For small businesses (excluding distributors) the annual turnover must be less than AUD 50m. And related party dealings for royalties, licence fees and R & D arrangements must be less than AUD 500k.
Service-related party dealings must be less than 15% of turnover.
# 2 – Distributors
For distributors, it first sounds the same. The same annual turnover you had for small businesses applies here as well. Annual turnover must be less than AUD 50m.
And as before the related party dealings threshold of AUD 500k only applies to certain transactions, ie. royalties, licence fees and R & D.
But the third condition is different. You don’t look at service-related party dealings as a percentage of turnover as you did in # 1 for small businesses.
Instead, you look at the profit before tax as a percentage of turnover. For distributors, that profit-before-tax-to-turnover ratio must be 3% or more.
# 3 – Materiality
If your annual turnover is less than AUD 100m, related party dealings for royalties, licence fees and R & D are less than AUD 0.5m and IRPD is 2.5% or less of total Australian turnover, then you qualify based on materiality.
IRPD stands for International Related Party Dealings.
Only Business as Usual
These three criteria or options only apply to business-as-usual transactions like the sale of inventory or services. They don’t apply to related-party royalties, licence fees, R & D, loans and capital dealings.
# 4 – Low-Value Intra-Group Services
This is about when one related party provides services to another related party and one of these is in Australia or has a PE in Australia. Think of services like admin, marketing and the lot.
Services you receive must be 15% or less of total expenses
Services you provide must be 15% or less of the total revenue
And the markup must be 5% or less for services you receive and 5% or more for services you provide.
If you meet all this, then you can use simplified record keeping.
# 5 – Low-level inbound loans
For an inbound loan to qualify under option # 5, the loan balance must be no higher than AUD 50m, denominated in AUD and the interest rate must not exceed a certain benchmark that changes each year. In 2021 it was 1.79%, 1.83% in 2022 and 5.65% in 2023.
# 6 – Low Lovel Outbound loans
For an outbound loan to qualify under option # 6, the conditions are the same as for an inbound loan, except that the interest rate is the other way around.
As before, the loan balance must be AUD 50m or less denominated in AUD. But now the interest rate must hit the benchmark or exceed it. As before the benchmark changes each year and was 1.79% in 2021, 1.83% in 2022 and 5.65% in 2023 or LESS
# 7 – Technical Services
Technical service income qualifies for simplified record-keeping if they are 50% or less of IRPD in Australia. Again, IRPD stands for International Related Party Dealings.
The markup must be 10% or more for services provided. And 10% or less for services received.
Qualify
If you meet one of these seven criteria, then you can use the simplified rules for the relevant transaction. That usually means that the ATO might test that you qualify for the simplified rules, but if you do, won’t audit your transfer price.
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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.
Last Updated on 14 June 2023
Tax Talks spoke to Benedicte Olrik - Managing Director, Transfer Pricing at Andersen Global - for more details.
