Question 8

Transfer pricing risks arise in respect of service arrangements between Australian taxpayers and international related parties. To quantify these risks we need to identify the nature and significance of these service arrangements and the pricing methodology used, and ascertain the extent to which the taxpayer has transfer pricing documentation to support those dealings.

The dollar amounts or values asked for in this question are all based on your accounting records.

In completing this question exclude the following amounts, returned:

• at question 6 relating to royalties or licence fees
• at question 9 relating to derivative transactions
• at question 11 relating to other dealings of a financial nature including any borrowing/lending transactions.

For the purpose of this question, a service arrangement is one that is based on the performance of work by one party for the benefit of another party (refer to Employers Mutual Indemnity Association Ltd v. Federal Commissioner of Taxation [1943] HCA 36; (1943) 68 CLR 165 per Latham CJ at 174). The arrangement may be formal or informal. You may be the customer or the provider of the service.

Where the services are bundled in one charge and your accounting records do not separate them into the distinct service categories in this question, then you can either make a best effort to estimate an allocation to the service categories, or show the amount at 'Other services' and write a clear description of the nature of the various services received.

These services are divided into the following categories:

Treasury related services

Activities involved in the managing of the taxpayer's financial operations, including:

• transaction, investment and information services relating to securities, financial assets, financial liabilities, portfolios and/or other assets held by yourself or an international related party
• the generation of internal and external funding
• risk management systems development and review
• the management of currencies and cash flows
• complex strategies, policies and procedures relating to the taxpayer's finance.

Management and administration services

Management services are activities involved in the control, facilitation, and monitoring of the taxpayer's human resources (staffing) and financial resources (assets).

Administration services are activities that relate to the operation of the taxpayer, including:

• back office services
• administrative services associated with employee share-based plans/recharge amounts
• accounting services.

Administration services excludes activities relating to financing, marketing or production.

Insurance services

Insurance services are activities associated with the management of insurance contracts (predominantly undertaken through intermediaries). Effectively, the expenditure and revenue will represent intermediaries' commissions for providing an insurance management type service (for example, placement of the insurance portfolio to a third party or providing back office functions). The fee associated with insurance contracts should be shown at question 11.

Reinsurance services

Reinsurance services are activities associated with the management of reinsurance contracts (predominantly undertaken through intermediaries). Effectively, the expenditure and revenue will represent intermediaries' commissions for providing an insurance management type service in relation to reinsurance contracts (for example, placement of the insurance portfolio to a third party or providing back office functions). The fee associated with reinsurance contracts should be shown at question 11.

Research and development services

Research and development services are activities associated with the undertaking of research and development services on behalf of a contracting party on a systematic basis in order to develop intellectual property, where the entity providing the research and development services does not take title to any resultant intellectual property created in the provision of the service.

Sales and marketing services

Sales and marketing services includes amounts for services in respect of sales such as amounts, including commissions, derived or paid for services to facilitate the sale of goods or services.

Marketing services includes activities that involve acquiring new customers or business and maintaining a relationship with them, including:

• advertising
• brand promotion
• sales strategies
• customer support services.

Software and information technology services

Software and information technology services are activities involved in the support and maintenance of software and technology used by the taxpayer. Activities relating to the ownership of the software and technology are excluded, such as leasing and rental fees.

Technical services

Technical services are activities associated with engineering, architecture, design, project management and mining exploration.

Logistics services

Logistics services are activities that relate to transport, freight, storage, scheduling, sourcing and procurement.

Asset management services

Asset management services are activities associated with the management of assets, funds or investments undertaken on a discretionary basis in accordance with an investment strategy, with the provider of the services responsible for both of the following:

• acquiring, monitoring, managing and disposing of traditional and non-traditional financial products held by the taxpayer or a related party
• assessing, monitoring and managing the market risks associated with holding the financial products.

Other services

Other services are all other services not covered by the above categories.

To complete this question, you need to:

• identify all service arrangements between you and international related parties
• group the service arrangements into one of the eleven service categories (including the service arrangement category referred to as 'Other')
• calculate the total amount of expenditure incurred and the revenue earned in respect of each service category
• identify the principal arm's length pricing method used to set or review consideration in respect of each service arrangement undertaken with international related parties
• identify the percentage of dealings for which you have documentation
• provide a description of the nature of the service arrangements with international related parties recorded under the label 'Other services' (if applicable).

If you had international related party dealings regarding service arrangements during the income year, answer 'Yes' at label A of question 8 and complete the required label fields.

For your international dealings involving each type of services covered by items 8a, 8b, 8c, 8d, 8e, 8f, 8g, 8h, 8i, or 8j, complete the labels at each of those items as follows:

• At label C, write the total amount of expenditure you incurred for the service type.
• At label D, write the total amount of revenue you earned or derived for the service type.
• At label E, write the Appendix 5 code for the principal arm's length pricing method used to set or review consideration for the service type.
• At label F, write the Appendix 9 code for the percentage of the international dealings for the service type for which you have documentation. 'Percentage of dealings with documentation' refers to the aggregate dollar amount of transactions reported at this question for which you have relevant documentation (as per TR 98/11) expressed as a percentage of total dollar value of transactions reported at this question.

For your international dealings involving any other kind of services, complete the labels at 8k as follows:

• At label C, write the total amount of expenditure you incurred for the other kinds of services.
• At label D, write the total amount of revenue you earned or derived for the other kinds of services.
• At label E, write the Appendix 5 code for the principal arm's length pricing method used to set or review consideration for the other kinds of services.
• At label F, write the Appendix 9 code for the percentage of the international dealings for the other kinds of services for which you have documentation. 'Percentage of dealings with documentation' refers to the aggregate dollar amount of transactions reported at this question for which you have relevant documentation (as per TR 98/11) expressed as a percentage of total dollar value of transactions reported at this question.
• At label H, write a description of the other kinds of services. The description should be limited to 200 characters.

Example

During the income year an Australian taxpayer provided and received the following services.

The Australian taxpayer extracts the relevant data from the information above.

In completing this question the Australian taxpayer will disregard:

With this information the Australian taxpayer completes question 8 as follows: