TR 2014/D4 Transfer Pricing (Australia): Documentation Requirements

Par Robert Robillard - 4 mai 2015

This blogpost originally appeared on rbrt.ca.

Australia’s Draft Taxation Ruling TR 2014/D4 Transfer Pricing: Documentation Requirements was recently released.

Any Australian tax development is of interest to Canadian taxpayers since the Government of Canada has had a long tradition of looking across the world for its own public policies on various matters.

In this new DTR, noteworthy indeed is the fact that paragraph 69 indicates:

« ‘Prepared before the time by which the entity lodges its income tax return for the income year relevant to the matter (or matters)’ (paragraph 284-255(1)(a))

69. The transfer pricing documentation requirements specify that the records kept by an entity for the application of Subdivision 815-B or 815-C of the ITAA 1997 need to be ‘prepared before the time by which the entity lodges its income tax return for the income year relevant to the matter (or matters)’. »

Par. 77-85 provides an example of application where the « taxpayer » fails (somehow surprisingly) that « test »:

« 77. US Co is a US resident company for tax purposes that operates a global multinational enterprise producing merchandise and selling the merchandise around the world.

78. Aus Co is an Australian resident company for tax purposes and a subsidiary of US Co. Aus Co purchases merchandise from US Co and on sells the merchandise to unrelated Australian buyers.

79. Aus Co and US Co operate under a standardised global contract that includes terms for the cost of the merchandise. Aus Co maintains source documentation comprising the global contract and transactional data prepared by US Co at the time of the transaction. This information is held partly in paper form by Aus Co in Australia and partly in electronic form on a global shared drive. Aus Co has full and free access to the global shared drive. Aus Co did not have any other records that evidenced the application of Subdivision 815-B, such as the methods used or the comparable circumstances, as Aus Co relied on assurances from US Co that the costs were arm’s length in accordance with the OECD Guidelines.

80. Aus Co lodges its income tax return on the basis that there is no transfer pricing benefit as the arm’s length conditions and the actual conditions are the same. Aus Co then receives notification that a transfer pricing audit is to be conducted by the ATO. Aus Co subsequently obtains access to information from US Co that was brought into existence by US Co prior to Aus Co lodging its income tax return detailing the method used and a functional analysis that was not available on the global shared drive. Aus Co also subsequently submits a transfer pricing report produced by their tax agent after Aus Co has lodged its income tax return that supports the position that arm’s length conditions equate to the actual conditions.

81. The Commissioner conducts an audit and establishes that Aus Co got a transfer pricing benefit as, had the arm’s length conditions operated instead of the actual conditions, Aus Co’s taxable income would have been greater as specified in subparagraph 815-120(1)(c) of the ITAA 1997.

82. In considering whether Aus Co satisfied the transfer pricing documentation requirements under section 284-255, the Commissioner determined that:

(a)  the source documentation comprising the global contract and transactional data was accepted as being kept by Aus Co for the purposes of applying Subdivision 815-B of the ITAA 1997 as these records were prepared before the time Aus Co lodged its income tax return and was in the possession or otherwise ready and available to Aus Co. The documentation held in electronic form on the global shared drive is taken to be kept by Aus Co as Aus Co had full and free access to these records both at the time it applied Subdivision 815-B and on an ongoing basis;
(b)  the documentation that Aus Co subsequently obtained from US Co that was brought into existence by US Co prior to Aus Co lodging its income tax return detailing the method used and a functional analysis was not accepted as being ‘kept’ by Aus Co for the purposes of applying Subdivision 815-B of the ITAA 1997 as, even though these records were prepared before the time Aus Co lodged its income tax return, these records were not in the possession or otherwise ready and available to Aus Co for the purposes of applying the Subdivision; merely relying on assurances is not sufficient to satisfy the statutory requirement. For a record to be kept by an entity that entity is required to have knowledge of more than the record’s existence, it needs to have knowledge of its existence, format and content and be reasonably assured that it is fit for purpose i.e. that it is ready and available;
(c)  the transfer pricing report produced by Aus Co’s tax agent was not accepted as kept by Aus Co for the purposes of applying Subdivision 815-B of the ITAA 1997 as these records were not prepared before the time by which Aus Co lodged its income tax return for the income year relevant to the matter.

83. Records that are not kept by an entity for the application of Subdivision 815-B or 815-C of the ITAA 1997 or prepared after the income tax return for the income year is lodged cannot be taken into account for the purposes of meeting the transfer pricing documentation requirements under subsection 284-255(1) and paragraph 284-255(1)(a).

84. When applying the transfer pricing rules, entities are required to self-assess whether they would otherwise get a tax advantage from actual conditions that differ from arm’s length conditions. That is, the entity is required to assess their Australian tax position for income tax and withholding tax purposes as if the arm’s length condition had operated [footnote omitted]. In this context, entities are encouraged to ensure that their documentation is prepared contemporaneously.

85. Contemporaneous documentation is generally considered to provide a stronger indication of independent dealings as opposed to after-the-event documentation, which raises the issue of hindsight [footnote omitted]. Contemporaneous documentation can be prepared prior to, at the time of undertaking the dealings, or up to the time of lodging the relevant tax return. »

However, we also note that par. 63 of the DTR refers back to former paragraph 5.4 of the OECD TP Guidelines. An update may hence be required…

Robert Robillard, Ph.D., CPA, CGA, Adm.A., MBA, M.Sc. Econ., M.A.P.
Senior Partner, RBRT Inc.
514-742-8086; robertrobillard « at » rbrt.ca
www.rbrt.ca

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