Transfer Pricing Risks: cross border related party loans

An approach to assessing the transfer pricing risk associated with your cross-border related party loans (Loans).

2017-06-07

 16 May 2017, the ATO released Draft Practical Compliance Guideline PCG 2017/D4 (Guidelines) “ATO compliance approach to taxation issues associated with cross-border related party financing arrangements and related transactions”. The Guidelines should be seen as a risk assessment and warning tool but not a definitive guide to pricing Loans. 

The Guidelines will apply from 1 July 2017 to existing and newly created financing arrangements, structures and functions. 

Self-assessment

  • The Guidelines provide an arithmetical approach for taxpayers to self-assess the risk of their international related party loans (Loans) from a transfer pricing perspective.

  • Based on this assessment, taxpayers can decide on any necessary risk mitigation strategies.

  • Taxpayers lodging a Reportable Tax Position Schedule will also need to disclose whether they have undertaken a self-assessment against the Guidelines. 

ShineWing Australia is currently developing an assessment product for our clients to assess the risk profile of their Loans based on the Guidelines.

No safe harbours

  • The ATO is commended for being proactive and transparent with their risk assessment methodology with respect to Loans. Having said that, the Guidelines do not provide taxpayers with safe-harbours and the risks associated with not preparing transfer pricing documentation remain.

  • It also does not mean that the tax authorities of other jurisdictions will hold the same view as that of the ATO.

Six risk zones

The ATO’s compliance approach will differ depending on the risk rating of the Loans. The Guidelines outline six risk zones, reflected by a score calculated using the method set out in the accompanying schedule: 

Table TF article 070617

Where a Loan is assessed as low risk, the Commissioner will generally only fact check the risk rating and not apply compliance resources to review the arrangement. Conversely, the ATO is most likely to apply their compliance resources and review financing arrangements with a higher risk rating, as a matter of priority. 

The table attached in Appendix 1 allows taxpayers to calculate their risk score and the zone in which they fall. The table reflects the ATO expectations that:

  • the pricing of Loans should reflect the commercial incentive of achieving the lowest possible “all-in” cost for the borrower and

  • in most cases, the pricing of Loans should align to the costs that could be achieved by the parent of the global group.

Where a taxpayer is in the Yellow zone or above, we recommend that:

  • the risk be highlighted at the executive or board level

  • the taxpayer work cooperatively with the ATO to resolve any differences

  • transfer pricing documentation be prepared to support the arm’s length nature of the arrangement

  • if necessary, re-evaluate the pricing of existing Loans.

Regardless of the risk zone, all taxpayers having transactions involving Loans should ensure that legal agreements evidencing terms and conditions of the Loans are prepared. 

If you have any questions, please contact Daren Yeoh (+61 3 8635 1888), Yang Shi (+61 3 8538 2217) or your ShineWing Australia relationship partner.

Daren Yeoh
Partner, Tax
ShineWing Australia
T +61 3 8635 1888
E [email protected]

Yang Shi
Senior Manager, Transfer Pricing
ShineWing Australia
T +61 3 8538 2217
E [email protected]

Appendix 1 (click here to enlarge)

Appendix 1 TF article 070617 

 

This publication is issued by ShineWing Australia Pty Limited (ShineWing Australia) exclusively for the general information of clients and staff of ShineWing Australia. The material contained in this publication is in the nature of general comment and information only and is not advice. The material should not be relied upon. ShineWing Australia, any related entity of those persons, or any of their officers employees or representatives, will not be liable for any loss or damage arising out of or in connection with the material contained in this publication. Copyright © 2017 ShineWing Australia Pty Limited. All rights reserved.