What this Ruling is about
This Ruling explains how the arm's length principle applies to international dealings between separate legal entities in the context of Division 13 of the Income Tax Assessment Act 1936 ('the Act') and the Associated Enterprises Articles in Australia's comprehensive Double Tax Agreements ('DTAs'). These are collectively referred to as 'Australia's transfer pricing rules'. Applying the arm's length principle leads to a calculation of the taxable income that might reasonably be expected to be derived if the parties were dealing at arm's length with one another.
It does not deal with profit allocations among separate branches or permanent establishments of the same enterprise. These will be the subject of a separate Ruling.
The Ruling explains the links between the concepts of the arm's length principle and of comparability and the methods that can be used to establish the arm's length outcome. This Ruling sets out: (1) the methodologies acceptable to the Australian Taxation Office ('ATO'); (2) when they are considered appropriate; and (3) the ATO's views on the concepts involved and the definitional issues that arise in applying them.
The principles contained in this Ruling are applicable to all nature of dealings, including dealings involving intangibles, intra-group services and cost contribution arrangements.
This Ruling examines in more detail than Taxation Ruling TR 94/14 ('TR 94/14') the methodologies that are available to apply the arm's length principle under Australia's transfer pricing rules.
The organisation of this Ruling follows the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations released by the Organisation for Economic Co-operation and Development in 1995 ('1995 OECD Report'); Chapters I to III are covered by this Ruling.
This Ruling generally accepts the principles in the 1995 OECD Report. Differences in emphasis or extensions of OECD principles adopted by the ATO are clearly indicated in the Ruling. Further Rulings may be issued dealing with the application of the principles in this Ruling to specific kinds of dealings, such as those dealt with in other Chapters of the 1995 OECD Report.
Date of Effect
This Ruling applies to years commencing both before and after its date of issue. However, the Ruling does not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of the Ruling (paragraphs 21 and 22 of Taxation Ruling TR 92/20).