By Maggie Chang, Principal, Accru Felsers
The ATO recognises that the transfer pricing record-keeping requirements of Subdiv 284-E of Sch 1 to the TAA 1953 may impose an administrative burden disproportionate to an entity’s risk of not complying with the transfer pricing rules. It has therefore developed simplified options that have been updated regularly.
The ATO’s “Simplified Transfer Pricing Record-Keeping” (STPRK) options allow qualifying entities to opt out of Australia’s full transfer pricing requirements. STPRK benefits businesses by reducing record-keeping requirements and minimising the cost of record-keeping and compliance. So how does a business know it is eligible and where does it start?
The ATO’s Guide PCG 2017/2, originally issued in February 2017, and most recently updated in December 2020, is a great resource for everything related to STPRK. However, determining whether a business is eligible can be complex. Consider the below:
- Eligibility criteria are strict.
- Documentation is required to prove eligibility.
- The ATO guidelines have changed several times in the past few years.
- Businesses must consider all relevant ATO criteria and definitions.
- Opt-in requires notifying the ATO via the business International Dealings Schedule (IDS) or Country-by-Country (CbC) Local File.
The options contained in the Guide reflect the types of transactions or activities the ATO believes are low-risk in the context of international related-party dealings. We have summarised the latest options and eligibility requirements below.
2021 Simplified Transfer Pricing Record-Keeping options
The ATO outlines 7 transaction types that are options for simplified record-keeping:
- Small taxpayers
- Low value adding intra-group services
- Low-level inbound loans
- Low-level outbound loans
- Technical services
These options apply to income years beginning on or after 1 July 2018 (or substituted accounting period) but taxpayers are still able to apply the options as they existed in the previous version for their first income year commencing on or after 1 July 2018 (or substituted accounting period).
2021 Eligibility Criteria
The ATO’s 2021 Simplified Transfer Pricing Record-Keeping Guide outlines activities identified as low risk for International Related-Party Dealings (IRPDs) and specifies criteria for businesses to self-assess their eligibility.
The main change this year is to the interest rate limits for inbound and outbound loans.– Maggie Chang, Principal, Accru Felsers
Note also that generally, businesses will not be eligible for any options if they have derived sustained losses or undergone a restructure within the year. If COVID-19 has had a significant economic or structural impact on a business, it may not be eligible.
The 2021 eligibility criteria are summarised below.
1. Small business taxpayers
Businesses with an annual turnover of up to $50 million are able to opt in if their related-party dealings involving royalties, licence fees or R&D arrangements are not greater than the combined threshold of $500,000, nor have specified service related-party dealings greater than 15% of their turnover. Additionally, they cannot be distributors.
Distributors with a turnover of up to $50 million who do not meet the combined threshold of $500,000 in related-party dealings involving royalties, licence fees, or R&D, and who do not have a profit-before-tax to turnover ratio of less than 3%, are eligible to opt in.
Companies with IRPDs of not more than 2.5% of the total turnover of their Australian economic group are eligible for this option if their total turnover is not more than $100 million, nor having related-party dealings involving royalties, licence fees or R&D greater than the combined threshold of $500,000.
*NOTE for businesses that are eligible for above options 1, 2 or 3, documentation requirements are not reduced for related-party royalties, licence fees and R&D arrangements, financial transactions and dealings of a capital nature.
4. Low Value Adding Intra-group services
Intra-group services up to $2 million are eligible, as are some above $2 million but note that for services a business receives, the total amount charged must be no more than 15% of the total expenses; or, for services it provides, the amount must be no more than 15% of the total revenue. The total expenses on these services cannot be more than 25% of the business pre-intra group services profit. Additionally, the mark-ups on the services need to be at least 5% for those provided or at most 5% for those received. However, this option is not applicable to other IRPDs.
5. Low-level inbound loans
Those with a loan balance of no more than $50 million throughout the financial year are able to opt in if the annual interest rate for each of their loans is not more than 1.79% in FY2021 (or 2.33% in FY2020) and their funds provided under the loan and their associated expenses are denominated in Australian dollars. This option is only applicable to eligible inbound loans but not other related-party dealings.
6. Low-level outbound loans
Those with a loan balance of no more than $50 million throughout the financial year are able to opt in if the annual interest rate for each of their loans is not less than 1.79% in FY2021 (or 2.33% in FY2020) and the funds provided under their loans and their associated expenses are denominated in Australian dollars. Similarly, this option is applicable to eligible outbound loans only.
7. Technical services
If the income from and expenditure on technical services is not more than 50% of the total IRPDs of the taxpayer’s Australian economic group, this option is available providing the mark-up for services received is not more than 10% and the mark-up for services rendered is at least 10%. As for the previous option, it does not reduce the documentation required for other IRPDs.
What does it mean if a business applies STPRK?
While applying an STPRK option does not waive a business’s compliance obligations under the transfer pricing rules, it does mean the ATO will generally not allocate compliance resources to examine the arrangement specified in that option, other than reviewing its eligibility on applying the STPRK option.
This article was first published in Thomson Reuters’ Weekly Tax Bulletin.