If you are a member of a privately owned and wealthy group and you engage in related party service arrangements, you should consider the transfer pricing rules and the economic substance of your arrangement.
We are particularly concerned with the mischaracterisation of service arrangements where the legal form is inconsistent with the economic substance of the arrangement.
For example, where:
- individuals in Australia are performing activities for an overseas related entity that may be characterised as central management and control (CMAC) or key value-adding functions, but these activities have been mischaracterised as routine or low-value services. This may give rise to corporate residency risk or a transfer pricing benefit, and is typically more common where there's a concentration of control in a founder or director, or a small number of individuals in a privately held business.
- service fees are paid to an overseas related entity, but the benefit received by the Australian entity is questionable, or in some cases, the service wasn't provided at all. This may give rise to a transfer pricing benefit, particularly if the overseas service provider has no employees, and all activities are either performed by staff in Australia or outsourced to third-party providers that are directed by Australian staff.
For more information, see:
- Taxation Ruling TR 1999/1 Income tax: international transfer pricing for intra-group services – provides guidance on transfer pricing for intra-group services
- Practical Compliance Guideline PCG 2018/9 Central management and control test of residency: identifying where a company's central management and control is located – provides guidance on determining corporate tax residency of foreign incorporated companies under the central management and control test.