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ATO clarifies treatment of JobKeeper in transfer pricing

Adrian Flores
Adrian Flores
17 July 2020 2 minute readShare
ATO

The Australian Taxation Office has outlined how it will treat JobKeeper payments in transfer pricing amid concerns a significant number of small businesses are potentially affected by such arrangements.

The ATO said it will review arrangements where the JobKeeper payment:

  • resulted in a change to the transfer price paid or received by the Australian entity
  • was shown to effectively shift the benefit of the government assistance to offshore related parties

However, it also said it expects that businesses will retain the benefit of the JobKeeper payment they receive.

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A JobKeeper transfer pricing example

An example put forward by the ATO is an Australian subsidiary of a multinational group provides information technology services to its offshore related party.

 

It charges the full cost of providing the services plus a profit mark-up of 10 per cent, of which the profit mark-up is based on a comparability analysis and is assumed to be arm’s length.

The subsidiary incurs $60 of salary cost and other operating costs of $40, totalling $100. The Australian subsidiary is eligible for and receives the JobKeeper payment amounting to $60, which subsidises the $60 of salary cost.

In addition, the JobKeeper payment is presented in the Australian subsidiary’s profit and loss statement as a reduction of the related salary expenses.

Correct transfer pricing treatment

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The ATO said the below example is the correct calculation, where the cost base of the service is not reduced by the JobKeeper payment for the purpose of calculating the transfer price.

The transfer price is calculated as follows:

  • salary expense ($60) + other operating costs ($40) = total cost ($100)
  • total cost ($100) + mark-up (10%) = transfer price ($110)

The profit and loss statement is calculated as follows:

  • revenue (transfer price) − salary expense − other operating costs = net income
  • $110 − $0 ($60 subsidised by $60 JobKeeper payment) − $40 = $70

“JobKeeper payments should not result in a reduction of the price of the service provided to the offshore related party,” the ATO said.

“No reduction should be made to the cost of the service. The cost base in the above example remains as $100, which continues to attract a mark-up of $10.”

Incorrect transfer pricing treatment

On the other hand, the ATO also revealed an example of an incorrect calculation for transfer pricing purposes, where the cost base of the service is reduced by the JobKeeper payments, resulting in a reduction of the price of the service.

In the incorrect example, the Australian subsidiary does not retain the benefits of the government assistance, instead subsidising the price of its service for the benefit of its offshore related party.

Transfer price:

  • salary expense ($60 subsidised by the $60 JobKeeper payment = $0) + other operating costs ($40) = total cost ($40)
  • total cost ($40) + mark-up (10%) = transfer price ($44)

Profit and loss statement:

  • revenue (transfer price) − salary expense − other operating costs = net income
  • $44 − $0 ($60 subsidised by $60 JobKeeper payment) − $40 = $4

“Independent parties acting in a commercially rational manner would not be expected to share the benefit of the government assistance,” the ATO said.

“The Australian entity should retain the benefit of the government assistance it receives.”

ATO clarifies treatment of JobKeeper in transfer pricing
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Adrian Flores
Adrian Flores

Adrian Flores is the deputy editor of MyBusiness. Before that, he was the deputy editor for SMSF Adviser as well as features editor for ifa (Independent Financial Adviser), InvestorDaily, Risk Adviser, Fintech Business and Adviser Innovation.

You can email Adrian at [email protected].

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