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.
A service arrangement is generally a negotiated agreement between parties where one party is a customer and the other is a provider. The arrangement may be formal or informal. You may be the customer or the provider.
These services are divided into the following categories:
Guarantees
Service activities associated with contracts under which a party agrees to perform an obligation or discharge a liability of another entity should that entity fail to do so.
Treasury related services
Activities involved in the managing of the taxpayer's financial operations, including:
- 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 finance.
Management services
Activities involved in the control, facilitation, and monitoring of the taxpayer's human resources (staffing) and financial resources (assets).
Insurance
Activities associated with insurance contracts (predominantly undertaken through intermediaries). Effectively, the expenditure and revenue will represent intermediaries' commissions.
Reinsurance
Activities associated with reinsurance contracts (predominantly undertaken through intermediaries). Effectively, the expenditure and revenue will represent intermediaries' commissions.
Marketing
Activities that involve acquiring new customers or business and maintaining a relationship with them, including:
- advertising
- brand promotion
- sales strategies.
Software and information technology services
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.
Administrative services
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.
Excludes activities relating to financing, marketing or production.
Other financial services
All other services not covered by the above categories.
In completing this question exclude the following amounts, returned:
- at question 8, relating to royalties
- at question 10 relating to derivative transactions
- at question 14, relating to any borrowing/lending transactions.
The dollar amounts or values asked for in this question are all to be based on your accounting records.
If you had international related party dealings regarding service arrangements during the income year, answer yes to this question and complete the required fields.
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 nine 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 principal service arrangements with international related parties recorded under the label 'Other financial services' (if applicable).
In the first column, labelled Expenditure, provide the total amount of expenditure incurred in respect of each service category.
In the second column, labelled Revenue, provide the total amount of revenue earned in respect of each service category.
In the third column, labelled Pricing methodology specify the principal arm's length pricing method used to set or review consideration in respect of each service category.
In the last row at AD, if you reported expenditure or revenue under 'Other financial services', provide a description of the principal service arrangement undertaken in this service category (limit your description to 200 characters).
Example
During the income year an Australian taxpayer provided and received the following services.
Country |
Related party |
Description of service arrangement |
Expenditure |
Revenue |
Pricing methodology code |
Andorra |
Yes |
Providing guarantees |
140,000 |
1 |
|
Australia |
Yes |
Payroll |
160,000 |
3 |
|
Belize |
Yes |
Admin services - recharge amounts |
150,000 |
10 |
|
Bermuda |
Yes |
Providing guarantees |
200,000 |
12 |
|
India |
Yes |
Hardware maintenance |
200,000 |
12 |
|
India |
Yes |
Foreign exchange advice |
210,000 |
1 |
|
Indonesia |
Yes |
Risk management |
190,000 |
1 |
|
New Zealand |
Yes |
Risk management |
170,000 |
1 |
|
Singapore |
Yes |
Accounting |
120,000 |
10 |
|
Singapore |
No |
Marketing |
320,000 |
na |
|
Singapore |
Yes |
Management |
290,000 |
1 |
|
United Kingdom |
Yes |
Provide training |
100,000 |
1 |
|
United States |
Yes |
Providing guarantees |
340,000 |
1 |
|
United States |
Yes |
Software support |
350,000 |
3 |
|
United States |
Yes |
Back office |
430,000 |
3 |
The Australian taxpayer extracts the relevant data from the information above.
Service arrangement type |
Country |
Expenditure |
Revenue |
Pricing methodology code |
Guarantees |
||||
Andorra |
140,000 |
1 |
||
Bermuda |
200,000 |
12 |
||
United States |
340,000 |
1 |
||
Total |
340,000 |
340,000 |
1 |
|
Treasury related services |
||||
India |
210,000 |
1 |
||
Indonesia |
190,000 |
1 |
||
New Zealand |
170,000 |
1 |
||
Total |
570,000 |
1 |
||
Management services |
||||
Singapore |
290,000 |
1 |
||
Total |
290,000 |
1 |
||
Software & information technology |
||||
India |
200,000 |
12 |
||
United States |
350,000 |
3 |
||
Total |
200,000 |
350,000 |
3 |
|
Administrative services |
||||
Belize |
150,000 |
10 |
||
Singapore |
120,000 |
10 |
||
United States |
430,000 |
3 |
||
Total |
270,000 |
430,000 |
3 |
|
Other financial services |
||||
Vocational training |
United Kingdom |
100,000 |
1 |
|
Total |
100,000 |
1 |
||
In completing this question the Australian taxpayer will disregard:
- the expenses incurred in respect of the marketing services provided by the entity located in Singapore, as the entity is not related to the taxpayer
- the payroll service undertaken with the related Australian based entity, as the arrangement is not a cross border transaction.
With this information the Australian taxpayer completes question 13 as follows.