The Australian Taxation Office (ATO) has recently updated Practical Compliance Guideline (PCG) 2017/2 Simplified transfer pricing record-keeping options.
At high level, under the simplified transfer pricing record keeping (STPRK) options, taxpayers can benefit from reduced transfer pricing documentation and increased certainty. To utilise one of the various STPRK options requires the satisfaction of relevant eligibility criteria.
The updated PCG makes a number of changes to the criteria as well as other aspects. Key changes include the following:
- Changes to the revenue thresholds for the “Small Taxpayers” and “Materiality” options – The revenue threshold for applying the “Small Taxpayers” option has increased from A$25m to A$50m. However, the ATO has now introduced a revenue threshold of A$100m for the “Materiality” option (where previously no revenue threshold was in place).
- Removal of the ‘specified countries’ eligibility criterion – Previously the STPRK options could not be applied if a taxpayer had any international related party dealings with ‘specified countries’. This restriction has now been removed.
- Reduction in the interest rate allowed for “Low Level Inbound Loans” option – Previously taxpayers were required to ensure that their arm’s length interest rate determined was less than the relevant Reserve Bank of Australia indicator lending rate (currently at 6.45 percent) in order to apply the “Low Level Inbound Loans” option. This interest rate has been reduced to 3.76 percent for the current year, which aligns to the “Low Level Outbound Loans” option.
- Accommodation of low value royalties, license fees and research and development (R&D) arrangements – Previously a number of the options excluded taxpayers that had any royalties, license fees or R&D revenues / costs. The new criterion provides a more accommodating $500,000 total threshold.
- Consolidation of the “Intra-Group Services” and “Management and Administration Services” options - The updated PCG has consolidated these options into a “Low Value Added Intra Group Services” (LVAIGS) option. Generally speaking, the LVAIGS options will apply to back office activities that use a cost plus 5 percent mark-up. Further, the updated PCG introduces an additional requirement for this option, being that the LVAIGS expenses should not exceed 25 percent of the pre-intra-group services charges profit of the taxpayer.
- Broader application of the “sustained losses” criterion – The “sustained losses” criteria requires taxpayers to have been profitable in one of their 3 most-recent years. This requirement now applies to all STPRK options at a practical level.
The ATO has recognised that the changes may mean that taxpayers currently utilising the STPRK options may need to revisit their arrangements. As such, the ATO has offered a transitional period where taxpayers can apply the prior STPRK guidance for their first income year commencing on or after 1 July 2018. Notwithstanding this, we would recommend that taxpayers review their transfer pricing arrangements to determine if they may benefit from the new options or plan accordingly should existing arrangements no longer qualify.
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