What this Ruling is about
This Ruling sets out the ATO's views on documentation and other practical issues that are relevant in setting and reviewing transfer pricing in international dealings. The Ruling covers the following specific issues: (1) the reasons for keeping documentation showing that international dealings are reported on an arm's length basis for tax purposes; (2) the advantages of having contemporaneous documentation; (3) identifying and discussing the risk of transfer pricing audits and adjustments; (4) developing and documenting the four steps for testing the arm's length nature of international transfer prices; (5) documentation relevant to the application of particular pricing methodologies; (6) documentation issues for small businesses or entities with low levels of international dealings; (7) documentation issues for certain business strategies; (8) access to information by the ATO and taxpayers; and (9) use of industry information and publicly available sources of data.
This Ruling should be read having regard to the principles in Taxation Ruling TR 97/20 (Income Tax: using arm's length transfer pricing methodologies in international dealings). In general, while that Ruling addresses the principles of transfer pricing methodologies, this Ruling discusses how these principles can be applied by ATO staff and taxpayers.
This Ruling examines in more detail than Taxation Ruling TR 94/14 (Income tax: Application of Division 13 of Part III (International Profit Shifting)) the nature and type of documentation that is relevant to supporting a contention that the consideration in relation to international dealings with associated enterprises complies with the arm's length principle (see paragraph 5 of Taxation Ruling TR 96/7).
This Ruling focuses primarily on dealings between separate legal entities. However, the views expressed are also relevant to support a contention that the allocation of income and expenses between the different parts of the same legal entity (e.g., between a permanent establishment and its head office or between two permanent establishments of the same enterprise) have been undertaken on a basis that is consistent with the arm's length principle.
Although the Ruling deals mainly with companies, the same principles apply where individuals, partnerships and trusts engage in dealings with associated enterprises. The expression 'associated enterprises', as used in the Ruling, includes both: • enterprises directly or indirectly connected through management, control or shareholding to which the Associated Enterprises Articles of Australia's DTAs may apply (and to which Division 13 may also apply); and • other enterprises whose dealings may be adjusted under Division 13 (i.e., independent enterprises who do not deal at arm's length with one another as discussed in paragraphs 50 to 53 of TR 94/14).
It is not the intention of this Ruling to lay down any conditions which restrict the exercise of any discretion. Each case must be decided on its merits.
The terms 'associated enterprises' or 'associated enterprise dealings' can be used interchangeably with the expression 'related party' or 'related party dealings' which appear in other ATO rulings and schedules.
Similarly, the expressions 'dealings' and 'international dealings' have been selected to encompass all of the conditions that operate between associated enterprises in their commercial or financial relations across national borders.
The terms 'comparable uncontrolled transactions' or 'comparable uncontrolled dealings' used in this Ruling may include dealings between associated enterprises as discussed in subparagraph 2.11(4) of TR 97/20 where the circumstances outlined in paragraphs 2.19 to 2.21 of that Ruling are met.
The term 'multinational enterprise group' or 'MNE group' used in this Ruling refers to a group of associated companies with business established in two or more countries. The term 'multinational enterprise' or 'MNE' refers to a company that is part of an MNE group.
Date of effect
This Ruling applies to years commencing both before and after its date of issue (but see paragraph 2.13 of the Ruling in relation to penalty considerations). However, the Ruling does not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Ruling (see paragraphs 21 and 22 of TR 92/20).