With transfer pricing gaining so much attention, we have seen an increased interest in accountants wanting to partner with us and outsource part or all of their transfer pricing. This allows them to give clients expert advice while maintaining the client facing relationship. With transfer pricing being a highly specialised area, we thought we’d put together a guide on what and when to outsource the transfer pricing side of your client’s taxation.
On April 2016, the ATO released four tax alerts as early warnings to taxpayers and advisors on high-risk transactions that can be considered profit-shifting arrangements. The ATO stated the tax alerts intend to stop tax advisors (and taxpayers) from marketing, selling and implementing tax avoidance schemes. Therefore, taxpayers and advisors are expected to be questioned about tax schemes and their transfer pricing implications. For more information read our article about the four tax alerts blog/the-ato-warns-taxpayers-and-advisors-on-profit-shifting-arrangements/.
With this in mind, we have compiled a list of tell-tale signs, so you can be sure if you are better off to outsource your transfer pricing.
In the area of Transfer Pricing, there is no quick way to educate yourself on how to fill accurately the questions required on the International Dealings Schedule (IDS). With 18 questions on the tax return, it may be tempting to have a go, but it’s all too easy to tick the wrong box, putting yourself and your client right in the middle of the ATO’s firing line. Therefore, before doing so, remember that the IDS is the main risk assessment tool that the ATO uses to decide whether to proceed with a Client Risk Review or Transfer Pricing Risk Review and therefore incorrect responses can lead to unnecessary questions from the ATO.
Unfortunately, more often than not, IDS’s that are filled incorrectly lead to unnecessary transfer pricing risk reviews. This results in the client incurring expensive fees and devoting time to answering questions from the ATO. Tax agents and public officers should also consider the legal liability related to signing a tax return with an incorrect response in the IDS.
An example scenario we often see is the advice provided in the case study below.
AustCo has entered into international dealings over $2 million during the income year 31 December 2014 as follows:
Intercompany loan average balance: AU$3m
Sales to international related parties: AU$1.5m
Total international related party dealings $.4.5m
The tax agent recommended to his client not to complete the IDS as its international related party dealings did not exceed AU$2 million (excluding loans) during the income year 31 December 2014. In this case, the tax agent provided incorrect advice to his client as the instructions for completing the IDS stated that the international related party dealings should be calculated including intercompany loan balances.
To answer the 18 questions in the IDS, companies have to support their responses with transfer pricing documentation. This documentation is usually prepared months in advance and should be ready before lodging the income tax return. The information in the transfer pricing documentation will impact each of the questions on the IDS. Without the correct documentation as evidence to support each answer and/or attempting to answer questions without understanding transfer pricing, you are effectively not complying with the Tax Agent Code of Conduct ‘competence’ criteria. According to the code of conduct for a tax, agent to be competent in the services it offers it must maintain the knowledge and skills relevant to the tax agent services.
Principles of the code of professional conduct ‘Competence’:
In some cases, multinational enterprises (MNE) will advise that their parent company has 100% transfer pricing documentation (also known as code 6 in the IDS). Australia however, has recently undergone many changes to the local requirements for transfer pricing. As a result, any documentation not recently completed in Australia and in accordance with the latest legislative guidelines, will be insufficient and draw the attention of the ATO.
Often the tax agent or public officer comes to ‘logger heads’ with the subsidiary or parent company over this. If you succumb to the pressure and sign off the IDS and income tax return on the basis that the subsidiary has 100% transfer pricing documentation, you are not complying with the code of conduct and will be held liable for providing information on the IDS that is incorrect. It’s best to refer these clients early on to a transfer pricing specialist who deals with these issues on a regular basis and can provide adequate information to the parent company.
This is one of the most common issues we come across regarding transfer pricing and the IDS. If the wrong method is chosen, then everything from then on, will be incorrect or inconsistent with the requirements of the ATO and your documentation will not be sufficient as supporting evidence. It is a common precursor, that if don’t know which method to use, or understand the reasons why you chose that method, then you should be outsourcing the transfer pricing documentation and IDS preparation.
Some tax agents have knowledge of transfer pricing, but they don’t have access to the database to complete the benchmarking (also known as economic analysis). If this applies to you, you can outsource the benchmarking part only to us at Transfer Pricing Solutions. We prepare the data gathering, benchmarking analysis, draft and final reporting. As a tax agent, you can choose to be as involved in the process as much or as little as you like. We then provide you with the relevant documentation as a branded or white label solution.
Whether you just want some transfer pricing advice, to outsource a small portion of the transfer pricing requirements, or someone to look after the entirety of this specialised area, then Transfer Pricing Solutions can help you. Call the team today, to make sure that you are 100% compliant with the latest legislative guidelines.
+61 (3) 59117001
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The Malaysian Finance Bill 2020 incorporates transfer pricing-related changes to the current Income Tax Act, 1967 (“ITA”). The changes permit significantly greater authority to the Malaysia Inland Revenue Board (“MIRB”) and re-emphasises the importance of transfer pricing compliance, with effect from 1 January 2021.
The OECD guidance emphasised that, besides interest rates, all terms and conditions of the financing transactions (including the volume of debt) should be tested against the arm’s length principle.