You are correct in that transfer pricing auditors in Australia are experienced and quite sophisticated. That being said, they are pragmatic when it comes to choosing their audit targets. From a high level, they are most concerned about the reasonableness of profitability and the quality of transfer pricing documentation. Companies with "less than realistic" levels of profitability and "poor" documentation on a scale of 1-5, are more likely to face an audit and penalties. In other words, a taxpayer with a clear explanation of the business operations and benchmarking will be far better placed to avoid an audit. Your transfer pricing will be rated on a scale of 1-5 if they select your company for a Transfer Pricing Record Review (TPRR)

Since you are a minerals business, you may be able to point at a commodities exchange when setting your intercompany pricing. It's a safe bet that a more senior transfer pricing auditor will have some background in commodities. If you were mining and exporting gold, for example, the ATO's starting point would be that any intercompany pricing should be based on those third-party prices. If you are using some other pricing methodology, you need to be able to explain why that the alternative is more appropriate than what might otherwise be found on the exchange. You should also have intercompany contracts and policies in place as additional support

Bottom line, your transfer pricing documentation needs to tell a clear, convincing story to someone who may not know much about your company. They will read it and draw conclusions based on the arguments you put forward - including rating your reports on a scale of 1-5. Showing that you put some thought into things early in the process(e.g. intercompany contracts signed up front) will also make for a better argument. If you have already prepared documentation for other countries, I would leverage this information to the extent possible

After spending four years in Australia, I found the most costly disputes were where the company "has always done it this way" with transfer pricing, and the ATO develops their own argument about how things should have been done. If you put forth your own narrative early in the process, you are far better placed than 90% of the medium-sized companies out there.

Hope this helps. Feel free to follow-up with a question at your convenience.


Alex Martin

This question has just been flagged to me. I apologise for the late response.

Like many tax questions, especially those involving cross-border transactions, the short answer is that "it depends". In this case the threshold issue is whether your intended mineral product related transactions will involve truly arm's length vendors/purchasers, or be between related parties. In this connection, the Australian rules are triggered primarily by related party, cross-border transactions.

If there are related party cross-border transactions, you may have the added complication of similar (possibly conflicting) rules in the second party jurisdiction/s. To the extent that a second party jurisdiction has a tax treaty with Australia, there should be rules in that treaty about avoiding the risks of double taxation.

One of the big risk factors in Australia is that tax returns are submitted under a self-assessment regime (basically an honour system). Tax returns are not regularly audited. Thus, if a corporation does not get its transfer pricing right at the outset, substantial back taxes and penalties (both subject to compound interest) can potentially accrue for many years.

For example, it was recently reported that Sony Australia has been served with a circa $53 million back taxes assessment (including $21 million in penalties and interest) following a transfer pricing audit.

The Australian Tax Office has an "Advanced Pricing Arrangement" ("APA") details of which can be found @ (http://law.ato.gov.au/atolaw/view.htm?Docid=PSR/PS20111/NAT/ATO/00001). This allows corporations to pre-agree their pricing regimes with the Tax Office. Other tax jurisdictions such as US, UK, Canada have similar arrangements and it is potentially possible to coordinate mutual APA's involving several jurisdictions.

Many of the Big 4 accounting firms have detailed information online which can be quite useful, but remember that the data they publicly provide is designed to pitch their solution products.

If the minerals you are to be dealing with are regularly traded on metals or futures exchanges, the factual arm's length prices applicable are readily available. That should make it relatively straightforward to either "manage" your exposure internally (i.e., if you have a dedicated tax or treasury function they can readily access most of the legal data they need from the ATO's comprehensive website), or to settle an acceptable APA with the ATO and any relevant second jurisdiction/s.

I am happy to rpovide further clarification if needed.