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Here are five transfer pricing examples that cover common transfer pricing issues.
Transfer Pricing Examples
In this episode, Benedicte Olrik of Andersen Australia will go through five transfer pricing examples with you that cover common scenarios.
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.
Transfer Pricing Examples
Distributors, inbound loans and growing start-ups are the most common areas for small to medium businesses in Australia to fall foul of Australia’s transfer pricing rules. So these three areas feature in the transfer pricing examples below.
For small to medium businesses most of the transfer pricing issues are about qualifying for the simplified record-keeping options. And so this is what all five examples are about. Showing that you qualify for the simplified rules.
Simplified Transfer Pricing Record Keeping
Before you worry about your reasonably arguable position – or in short ‘RAP’ – you need to work out whether you qualify for simplified transfer pricing record keeping (‘STPRK’) or not.
If you qualify for simplified record keeping, your RAP is just about showing how you qualify for STPRK. But you don’t have to document support for your transfer price itself.
Whereas if you don’t qualify for STPRK, then you need to document how you got to your transfer price, using one of the five methodologies outlined in TR 97/20. Please see episode 384 for more details about these five methodologies.
So all of the examples below are about the simplified rules and how to qualify. Because that is where most of the action is for small to medium businesses in Australia.
1 – Inbound Distributor Without Losses
Let’s say you are an inbound distributor with an annual turnover of AUD 40 million and a profit-before-tax of 3.5%.
You qualify as a Distributor for Simplified Transfer Pricing Record Keeping (‘STPRK’). So instead of doing full-size transfer pricing documentation, you verify and document your eligibility for STPRK.
2 – Inbound Distributor with Losses
Let’s now say you are an inbound distributor again but this time you have losses with an annual turnover of AUD 20 million.
And let’s assume that the losses are a once-off. They might be due to supply chain delays triggered by a major international incident. Or due to the loss of a major contractor.
In that case, use the simplified rules as a distributor but justify the gap. Show how you wouldn’t have made a loss if supplies had arrived on time. Or if you hadn’t lost your major customer. Some call this a ‘commerciality analysis’ – a big word.
Check the ATO’s guidelines for medium-risk inbound distributors.
3 – In-bound Loans
Let’s assume that the intercompany loans meet the STPRK option for low-inbound loans. In that case, you just have to document how you qualify for this STPRK option.
4 – Low-value Intragroup Services
Are the intragroup services less than AUD 2m or more? If they are less, use the De minimis rule.
5 – Start-up
Let’s assume you are a start-up. And at the beginning, you just did a few things to support your parent’s expansion plans. And hence the cost-plus arrangement with your parent worked fine and qualified for STPRK.
But over the years you have added more and more activities that generate income.
Make sure you check your continuing eligibility for STPRK. It happens quite often that start-ups grow and then suddenly are caught out in the rain, since they no longer qualify for simplified record keeping but have no RAP to justify their transfer pricing.
Summary
For small to medium businesses in Australia, transfer pricing is mainly about simplified record keeping. Make sure you document how you qualify for one of the seven options in PCG 2017/2.
MORE
TP Reasonably Arguable Position
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.
Last Updated on 18 July 2023
Tax Talks spoke to Benedicte Olrik - Managing Director, Transfer Pricing at Andersen Global - for more details.
