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Australia: ATO continued focus on identifying high-risk transfer pricing arrangements

Australia: High-risk transfer pricing arrangements

The Australian Taxation Office (ATO) has released the 2018 “International Dealings Schedule” (IDS) stationery and instructions for 2018 tax years.

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The updates to the 2018 IDS focus on identifying topical transfer pricing risks, and highlights include: 

Research and development (R&D) arrangements

The ATO has included a new question on the IDS focused on cross-border R&D cost-plus arrangements, asking for separate disclosure of the relevant R&D costs incurred in providing the services and the cost-plus margin received. This will highlight to the ATO the actual mark-up applied for R&D activities undertaken in Australia. As previously experienced when new questions are introduced to the IDS, the ATO has acknowledged that taxpayers’ accounting systems may not automatically collect and aggregate the information required, and therefore a “best efforts” approach can be taken to estimate the relevant figures. 

Offshore hubs

The 2018 IDS also includes a new transfer pricing question in Section C. That question (Question 28b) requests taxpayers to disclose if any “schedules” within the ATO’s Practical Compliance Guideline 2017/1 apply to the taxpayer's offshore transactions, and if so the value of any expenses or revenues. While this question will currently only be relevant in the context of offshore marketing hub arrangements, it is anticipated that further schedules would be included in the future for other centralised operating models involving procurement, sales and distribution functions. 

Hybrid arrangements

With the introduction of the Tax Laws Amendment (Tax Integrity and Other Measures No.2) Bill 2018, that addresses hybrid mismatch arrangements, taxpayers will need to disclose the existence of any arrangements under two new questions.

Concession for FX disclosures

The IDS instructions have been updated to include the same foreign exchange (FX) disclosure concessions as the Australian Local file. This is the second year the IDS has required the disclosure of FX gains returned or losses deducted in relation to dealings with overseas related parties. 

Conclusion

The disclosure requirements have been reduced for certain types of transactions, provided that certain criteria are met. However, additional analysis is needed to determine whether the reduced disclosure applies. When it does not, more granular detail is required.

The 2018 IDS also includes a number of other updates in:

  • Section C – Interests in foreign entities
  • Section D – Thin capitalisation (in anticipation of the ATO’s thin cap TDs and PCGs)
  • Section E – Financial services entities

Given the IDS is used for risk assessment purposes, taxpayers need to understand and determine appropriate disclosures for the new IDS questions.

 

For more information, contact a tax professional with KPMG’s Global Transfer Pricing Services in Australia:

Jane Rolfe | +61 3 9288 6341 | janerolfe@kpmg.com.au

Bonnie Quinlan | +61 3 9838 4626 | bquinlan1@kpmg.com.au

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