Local file – Part B: Guidance on providing International Related Party agreements

1. Copies of IRP agreements generally need to be provided in Part B for the transactions shown at Part A of the local file which are not covered by the Exclusions List.
2. A key design feature of the local file is the requirement to show values in Part A and provide agreements in Part B for individual transactions unless the transaction is covered by one of the eight categories on the Exclusions List. This transaction level reporting design feature is expected to significantly improve the ATO’s ability to undertake high level risk assessment of profit shifting through related party transactions.
3. The rules in this guidance seek to balance the function of the local file and the compliance costs associated with providing agreement documentation in Part B of the local file. Accordingly the ATO will not require all of the agreement documentation for transactions shown at Part A for agreements included in a Relevant Agreement Series (RAS).
4. The rules have been developed to reduce compliance costs while not inadvertently creating opportunities for non-disclosure of potentially significant profit shifting risks through aggregating transactions. For example, the RAS rules are designed so that certain kinds of agreements cannot be aggregated, in particular:  
   1. agreements for financing transactions involving different currencies or different express tenors or duration cannot be aggregated, except to the extent permitted under the special rules for banks
   2. agreements covering derivative, guarantee/indemnity or insurance/reinsurance transactions that hedge, guarantee or insure specific exposures, liabilities or risks which arise in connection with the Reporting Entity’s related party dealings cannot be aggregated with agreements for other derivatives, guarantees/indemnities or insurance/reinsurance
   3. for Reporting Entities that are an offshore banking unit (OBU), agreements for transactions which are OB activities (taxable or deductible at the special concessional income tax rate of 10%) cannot be aggregated with agreements for transactions which are non-OB activities (taxable or deductible at the normal corporate income tax rate, currently 30%).
    
5. Outlined below are:  
   • General principles on providing IRP agreements
   • What comprises written agreements in various scenarios?
   • Relevant Agreement Series
   • The principles for determining a material representative agreement in selecting the agreement documentation provided at Part B for an RAS
   • Special rules that apply to OBUs and banks
    

General principles on providing IRP agreements

Written agreement is provided in connection with information provided in Part A for relevant IRP transaction

6. The local file has been designed so that, unless a transaction is on the Exclusions List, the values shown in Part A of the local file for a particular transaction are linked with either:  
   1. an agreement provided in Part B or an identified agreement previously provided to the ATO, or
   2. an indication by the Reporting Entity in Part B that either  
      1. there is no written agreement documentation covering the transaction shown at Part A, or
      2. the Reporting Entity is not able to obtain from any of the related counterparties the written agreement documentation covering the transaction shown at Part A.
       
    
7. If a single written agreement covers more than one kind of transaction category then:  
   1. the information required in Part B will need to be provided for each kind of transaction category covered by the agreement
   2. each of the transactions shown in Part A will need to be linked to the written agreement provided in Part B of the local file.
    

Information to enable identification is needed where written agreements have already been provided to the ATO

8. Agreements for transactions shown at Part A that have already been provided to the ATO do not need to be provided again. However the following information must be provided in Part B to ensure the ATO can identify the correct agreement:  
   1. the title of the agreement
   2. the year in which the agreement was provided to the ATO.
    
9. If the agreements that have already been provided to the ATO have subsequently been amended and the amendment agreements have not been provided to the ATO, the amendment agreements or the original agreement incorporating the amendments need to be provided at Part B.

No requirement to create written agreement but must indicate in Part B if no written agreement exists

10. Reporting Entities are not required to create written agreement documentation solely for the purposes of Part B of the local file. However, if there is no written agreement documentation, the Reporting Entity must indicate that there is no written agreement in Part B.

Must indicate if written agreement cannot be obtained by Reporting Entity from related overseas counterparty

11. If there is written agreement documentation but the Reporting Entity is not able to obtain this from the related overseas counterparty, the Reporting Entity is required to indicate this in Part B.

What comprises written agreements in various scenarios?

12. It is expected it will often be the case that all the terms of an international related party dealing (IRPD) will be evidenced in a single executed written agreement between a Reporting Entity and its overseas related parties. In this common scenario, the executed written agreement should be provided in Part B.
13. However, if the terms of an IRPD have been amended by written agreement before or during the income year, the executed amendment agreement(s) or the original agreement incorporating the amendments should also be provided in Part B.
14. Where an agreement contemplates that specific terms will be agreed between the parties in another agreement(s), the agreement documentation for the transaction must include the other written agreement(s). For example:  
    1. a written ‘Confirmation’ agreeing the terms of a derivative will be provided together with the International Swaps and Derivatives Association (ISDA) master agreement or other agreement setting out the general terms agreed to apply for any derivative that is contracted between the parties
    2. written agreements for the supply of services, goods or other property ordered or supplied in accordance with an overarching agreement setting out general terms or processes for the supply will be provided together with the overarching agreement.
     

15. Where there is no agreement documentation for the transaction shown at Part A, but the Reporting Entity has other documents which record the terms of the agreement, the Reporting Entity has the option of providing these other documents in Part B.
16. If this scenario applies and the Reporting Entity chooses to use this option, the Reporting Entity will:  
    1. indicate in Part B there is no written agreement documentation covering the transaction shown at Part A
    2. provide the other documents recording the terms of the agreement.
     

Relevant Agreement Series

17. A Relevant Agreement Series (RAS) is a repeating series of transactions or dealings on revenue account between the Reporting Entity and the same IRP entity on the same terms except only for date, volume, price and delivery.
18. For these kinds of transactions, an additional condition needs to be satisfied:  
    1. derivatives
    2. guarantees or indemnities
    3. insurance or reinsurance.
     

In these cases refer to RAS Condition 4.

19. Where an IRP agreement forms part of a RAS:  
    1. in Part A, the values for each kind of transaction category covered by the RAS are aggregated
    2. the criteria in the Exclusions List are applied on the basis of the aggregated amounts
    3. in Part B, written agreement documentation only needs to be provided for a material representative agreement in the RAS that was current during the income year.
     

What qualifies as a RAS?

20. For an agreement series to qualify as a RAS, these four conditions must be met:  
    1. agreements must be with the same IRP
    2. agreements must be on the same terms except for date, volume, price and delivery
    3. the transactions covered by the agreement must be on revenue account
    4. derivative, guarantee/indemnity or insurance/reinsurance agreements hedging, guaranteeing or insuring specific exposures, liabilities or risks arising in connection with the Reporting Entity’s related party dealings cannot be included in the same RAS as other derivative, guarantee/indemnity or insurance/reinsurance agreements.
     
21. The principles for determining a material and representative agreement of a RAS are outlined below at paragraphs 42–43.
22. There are also special rules if the Reporting Entity is an OBU or a bank:  
    1. the special rules for OBUs with respect to OB and non-OB activities are outlined below at paragraph 45
    2. the special rules for Condition 2 with respect to ordinary borrowings and loans, qualifying short term derivatives and qualifying FX derivatives of banks are outlined below at paragraphs 46–57.
     

RAS Condition 1 – agreements are with the same IRP

23. The RAS will only include agreements between the same parties.
24. Where the IRP agreement is between more than two parties, this condition means that all of the parties to the agreement must be the parties to all the other agreements in order for the agreements to qualify as a RAS.

RAS Condition 2 – agreements on same terms except for date, volume, price and delivery

25. The RAS will only include agreements on the same terms except for date, volume, price and delivery.

Agreements on same terms except for date

26. The reference to ‘same terms except for date’ means that the particular dates on which the agreement was entered into and obligations are fulfilled do not need to be the same. For example, the following dates do not need to be the same:  
    1. when goods are delivered
    2. when services are provided
    3. when payments are made
    4. when property is transferred.
     
27. An agreement will not qualify as being part of a RAS if it does not have the same express tenor or duration. For example:  
    1. an agreement under which a loan can only be redeemed by the lender after five years will not be considered to be on the ‘same terms except for date, volume, price and delivery’ as an agreement under which a loan can be redeemed by the lender after one year.
    2. an AUD/USD forward exercisable in nine years and 11 months after its date of effect will not be considered to be on the ‘same terms except for date, volume, price and delivery’ as an AUD/USD forward exercisable in three months after its date of effect.
     

Accordingly, these agreements cannot form part of the same RAS.

Agreements on same terms except for delivery

28. The reference to ‘same terms except for delivery’ means there may be variation in the means by which goods or services provided or obtained under the agreements are delivered. For example, agreements to purchase the same kinds of goods which would otherwise be in the same RAS will not fail RAS Condition 2 merely because one of the agreements provides for delivery by ship to the Port of Sydney and another agreement provides for delivery by ship to the Port of Wollongong.

Agreements otherwise on same terms

29. An agreement will not be on the same terms as another agreement merely because the transaction occurring under both agreements is of the same Table 4 Transaction Category, for example, a fixed-for-floating interest rate swap.
30. RAS Condition 2 also means that a RAS will not include agreements on reverse, or mirror, terms. For example, the following agreements cannot be aggregated for Part A or otherwise included together under a RAS, even if the terms of the agreements are a perfect mirror or reverse of each other:  
    1. an interest rate swap where the Reporting Entity pays floating payments and receives fixed payments cannot be aggregated with an interest rate swap where the Reporting Entity pays fixed payments and receives floating payments.
    2. a borrowing by the Reporting Entity cannot be aggregated with a loan by the Reporting Entity.
    3. a purchase of goods cannot be aggregated with a sale of the same kind of goods.
     
31. Other examples of IRPDs that will not be considered to be ‘on the same terms except for date, volume, price and delivery’ include:  
    1. agreements for sale or purchase of different kinds of tangible property – refer to paragraphs 32–34 below
    2. agreements granting rights to use different intellectual property, for example, different patents
    3. agreements covering financial dealings in different currencies, for example, a loan of Australian dollars versus a loan of US dollars, or a USD/AUD forward versus a Euro/AUD forward
    4. agreements for raising funds in different ways, for example, borrowing under a loan versus obtaining funds by issue of promissory notes
    5. agreements providing guarantee, indemnity or insurance of a different kind of liability or risk, for example, an indemnity of liabilities arising under warranty of products sold to Australian customers versus an indemnity of loans provided to Australian customers
    6. agreements that have different express provisions for termination or damages, for example, agreements that provide for termination by a party only upon payment default versus agreements that may be terminated by a party other than upon default
    7. agreements that are expressly able to be assigned versus agreements that expressly provide they are not able to be assigned.
     

Agreements for sale or purchase of same kind of goods, commodities or raw materials

32. Agreements will not be treated as for the sale or purchase of different kinds of tangible property merely because the agreements cover different particular goods, commodities or raw materials, as long as the goods, commodities and raw materials are of the same kind.
33. For example, agreements covering the following kind of goods, commodities or raw materials may be included in a RAS if the RAS Conditions are otherwise satisfied:  
    1. agreements for the sale or purchase of different specific blends of refined oil
    2. agreements for the sale or purchase of different qualities or physical condition of brown coal
    3. agreements for the sale or purchase of different models of refrigerators and freezers
    4. agreements for the sale or purchase of similar kinds of pharmaceutical products.
     
34. Examples of agreements that would not be treated as for the sale or purchase of the same kind of goods, commodities or raw materials include:  
    1. an agreement for the sale or purchase of aluminium versus copper
    2. an agreement for the sale or purchase of bauxite versus aluminium
    3. an agreement for the sale or purchase of refrigerators versus computers
    4. an agreement for the sale or purchase of various over-the-counter medications versus various medical devices.
     

Special rules for banks in relation to RAS Condition 2

35. Special rules apply to banks which permit, subject to certain conditions, the inclusion of the following transactions in a single RAS if the RAS conditions are otherwise met:  
    1. short term derivatives with different tenors
    2. short term ordinary borrowings or ordinary loans with different tenors
    3. qualifying FX derivatives with differing currency pairs.
     

This means that a variation of RAS Condition 2 may apply to a bank’s qualifying derivatives, loans or borrowings (see paragraphs 46-57 below).

RAS Condition 3 – The transactions covered by the agreement must be on revenue account

36. The transactions covered by the agreement must be on revenue account. Transactions of a capital nature for Australian tax purposes do not qualify for inclusion in a RAS. For example, the assignment of a patent to an IRP cannot be included in a RAS if the assignment is on capital account for taxation purposes.
37. The distinction between a transaction on revenue account and a transaction on capital account for Australian income tax purposes is explained in the instructions to Question 13 of the International Dealings Schedule (IDS):

Whether dealings are capital or revenue in nature is a matter to be decided based on the facts and circumstances of each case. The leading Australian case on this topic is Sun Newspapers Ltd and Associated Newspapers Ltd v FC of T (1938) 61 CLR 337; 5 ATD 87. This case established that expenditure incurred in establishing, replacing and enlarging the profit yielding structure (i.e. the business entity/structure) is of a capital nature and should be contrasted with working or operating expenses incurred to operate the business or profit yielding structure. The test laid down in the Sun newspapers case requires the following three factors to be considered and weighed in deciding whether expenditure is capital or of a capital nature:

The nature of the benefit or advantage obtained or secured by the incurrence of the expenditure, for example, whether the expenditure secures an enduring benefit.

The manner in which the benefit or advantage so obtained or secured is to be relied upon or enjoyed.

The means adopted to obtain or secure the benefit or advantage.

There are many other decisions of the Australian courts applying these principles in Sun Newspapers to various cases. For more information, refer to ATO guidance such as taxation rulings. We strongly recommend that you obtain appropriate guidance or professional advice in relation to the particular facts and circumstances of your case.

RAS Condition 4 – Derivatives / guarantees / insurance for Reporting Entity’s related party exposures / liabilities / risk cannot be included in same RAS as other derivatives / guarantees / insurance

38. Agreements for derivatives, guarantees/indemnities or insurance/reinsurance that are hedging, guaranteeing or insuring specific exposures, liabilities or risks arising in connection with the Reporting Entity’s related party dealings cannot be included in the same RAS as:  
    1. agreements for derivatives which are not hedging or offsetting specific liabilities or exposures, or
    2. agreements for derivatives, guarantees/indemnities or insurance/reinsurance that are hedging, guaranteeing or insuring specific kinds of exposures, liabilities or risks which are not exposures, liabilities or risks arising in connection with the Reporting Entity’s related party dealings.
     
39. For the purpose of applying RAS Condition 4, agreements for derivatives, guarantees/indemnities or insurance/reinsurance that are hedging, guaranteeing or insuring specific exposures, liabilities or risks arising in connection with the Reporting Entity’s related party dealings will not include:  
    1. agreements for derivatives hedging or offsetting specific exposures or liabilities of the IRP derivative counterparty arising in connection with a related party transaction which is not with the Reporting Entity (or a member of the Reporting Entity’s Australian consolidated or MEC group)
    2. agreements for guarantees or indemnities where the Reporting Entity guarantees or indemnifies a liability of the IRP counterparty arising in connection with a related party dealing which is not with the Reporting Entity (or a member of the Reporting Entity’s Australian consolidated or MEC group)
    3. agreements for insurance or reinsurance where the Reporting Entity provides insurance or reinsurance to the IRP counterparty to insure or reinsure risks arising in connection with a related party dealing which is not with the Reporting Entity (or a member of the Reporting Entity’s Australian consolidated or MEC group).
     

Consequences of an IRP agreement being part of a RAS

40. The consequences of an IRP agreement forming part of a RAS are:  
    1. the Reporting Entity must show the aggregated values at Part A for all the agreements in the RAS in relation to each Table 4 Transaction Category covered by the agreement (subject to the special rule for OBUs that OB activities and non-OB activities cannot be aggregated)
    2. in Part A, the Reporting Entity must indicate  
       1. the transaction details shown at Part A for the relevant Table 4 Transaction Category are part of a RAS and whether one of the special rules for banks has been applied
       2. which of the following number bands represent the number of agreements in the RAS during the income year  
          1. 1–5
          2. 6–50
          3. 51 or more
           
       3. if the Reporting Entity is an OBU under subsection 128AE(2) of the Income Tax Assessment Act 1936 (ITAA 1936) or section 717-710 of the Income Tax Assessment Act 1997 (ITAA 1997), whether the transactions at Part A are an OB activity under sections 121D and 121EAA of the ITAA 1936
        
    3. in Part B, the Reporting Entity is only required to provide written agreement documentation for a material representative agreement in the RAS.
     
41. Refer to paragraphs 42-43 below for the principles for determining material representative agreements.

The principles for determining a material representative agreement in selecting the agreement documentation provided at Part B for a RAS

42. A consequence of an agreement being part of a RAS is that the Reporting Entity will only be required to provide written agreement documentation for a material representative agreement in the RAS in Part B for the associated transaction in Part A.
43. The principles for determining a material representative agreement are:  
    1. the documentation for the agreement does not contain materially fewer terms and conditions than documentation for other agreements in the RAS
    2. the documentation for the agreement is not expressed in a more abbreviated or summarised form than documentation for other agreements in the RAS
    3. the agreement documentation is for an agreement which fairly reflects the size and impact of the agreements in the RAS.
     

Special rules that apply to OBUs and banks

44. Special rules apply to certain transactions where the reporting entity is an OBU or a bank.

OBUs: OB and non-OB activity

45. Where a Reporting Entity is an OBU under subsection 128AE(2) of the ITAA 1936 or section 717-710 of the ITAA 1997, agreements for transactions which are OB activities cannot be included in the same RAS as agreements for transactions which are not OB activities. This means that any agreement for a transaction which constitutes an OB activity under section 121D of the ITAA 1936 cannot be included in the same RAS as an agreement for a transaction which the Reporting Entity has chosen to not be an OB activity under section 121EAA.

Banks and short term ordinary borrowings and ordinary loans: variation of RAS Condition 2

46. A special rule applies to banks which permits the inclusion of ordinary borrowings and ordinary loans with different tenors in a single RAS where:  
    1. the borrowings or loans are not at call or repayable on demand by the lender
    2. the tenor of the borrowings or loans is 12 months or less.
     
47. Where this special rule applies, RAS Condition 2 will be that agreements are on the same terms except for date, volume, price, delivery and tenor.
48. This special rule can only be used where the Reporting Entity or a member of the Reporting Entity’s consolidated group has an unconditional or a conditional Australian banking licence.
49. In Part A, the Reporting Entity will indicate if the special short term tenor rule for banks has been applied.

Banks and short term derivatives: variation of RAS Condition 2

50. A special rule that applies to banks permits the inclusion of derivatives with different tenors or durations in a single RAS for derivatives with a tenor or duration of 12 months or less.
51. Where this special rule applies, RAS Condition 2 will be that agreements are on the same terms except for date, volume, price, delivery and tenor.
52. This special rule can only be used where the Reporting Entity or a member of the Reporting Entity’s consolidated group has an unconditional or a conditional Australian banking licence.
53. In Part A, the Reporting Entity will indicate if the special short term tenor rule for banks has been applied.

Banks and FX derivatives: variation of RAS Condition 2

54. A special rule applies to banks which permits the inclusion of qualifying FX derivatives with differing currency pairs in a single RAS. Where this special rule applies, RAS Condition 2 will be that agreements are on the same terms except for date, volume, price, delivery and currency pair.
55. The conditions for applying this special rule are:  
    1. the Reporting Entity or a member of the Reporting Entity’s consolidated group must have an unconditional or a conditional Australian banking licence
    2. the internal rules of the Reporting Entity’s global group must provide that an entity (FX management entity) in the global accounting consolidated group is responsible for pooling and externally hedging the banking group’s FX risk
    3. the FX management entity enters into FX derivatives that back out, to the FX management entity, the FX exposure for third party customer exposures of the related counterparty (qualifying FX derivatives).
     
56. The reason why this special rule applies to banks is that banks are the market makers in relation to FX derivatives and are required to manage exposure to a wide range of different currencies as a consequence of their banking customers’ currency needs and exposures.
57. In Part A, the Reporting Entity will indicate if the special currency pair rule for banks has been applied.

Guidance on the provision of IRP agreements as part of Part B of the local file for CbC reporting.