Money
Issue No. 10 - April/May 2003
Taxing Times
by John Rawson
Many businesses think transfer pricing is an issue only for giant multinational companies, which direct economic activities to certain countries to capitalise on tax rate differentials.
That's a common - but misunderstood - view.
In fact transfer-pricing practices apply to any business that, by importing or exporting goods or services from overseas, is engaging in international-related party transactions.
Those smaller businesses that overlook the impact and spread of transfer pricing may be in for a rude shock, courtesy of the Australian Taxation Office (ATO).
The ATO is this year conducting a major review of the transfer pricing practices of small business - not just the usual transfer pricing targets, the multinationals at the top end of town.
At a general level, the review program that is being conducted by the ATO to improve taxpayers' compliance with the transfer pricing provisions contained in the Income Tax Assessment Act 1936.
In practical terms, the review program involves representatives of the ATO visiting the taxpayer to examine and analyse written documentation the taxpayer has in relation to its international related party transactions. The objective of the examination is to determine whether the taxpayer has sufficient documentation to support the responses in the Schedule 25A form attached to the annual tax return.
And the ATO will expect to see evidence of what has previously been disclosed.
The outcome of the review program depends on the ATO's assessment of the quality of the taxpayer's transfer pricing documentation and the commercial nature of a company's profitability. Where the ATO considers the documentation to be of high quality and is satisfied that its profit levels are commercial, it is unlikely to take any further action. However, the taxpayer could still be selected for a review program in the future.
As the ATO has targeted businesses that generally have low or negative pro...
