Australia: New transfer pricing rules introduced into Parliament Pricing Knowledge Network Alert

Pricing Knowledge Network Alert
Tax Controversy and Dispute Resolution Alert
Australia: New transfer pricing rules
introduced into Parliament
February 15, 2013
In brief
A Bill containing the proposed new Australian transfer pricing laws was introduced to Parliament on 13
February 2012. The transfer pricing provisions proposed in the Bill are largely consistent with the
Exposure Draft (ED) that was released in November 2012 (see our previous PKN Alert for details),
although there have been some notable changes.
The Bill also incorporates proposed changes to the general anti-avoidance rules (Part IVA). This article
focuses on the proposed transfer pricing rule changes.
In detail
The Bill has retained the
following elements of the ED:
The new rules will operate on
a self-assessment basis.
The rules will apply to
separate legal entities,
permanent establishments,
partnerships and trusts.
Specific provisions are
included dealing with the
interaction of the transfer
pricing and thin
capitalisation rules.
The key changes from the ED
include:
OECD guidance for dealings
between separate legal
entities is more firmly
endorsed. The qualification
in the ED that OECD
guidance did not need to be
considered where a “contrary
intention” appeared in the
law has been removed.
The provisions dealing with
disregarding of actual
transactions in certain
circumstances have been
more clearly drafted. The
Explanatory Memorandum
(EM) accompanying the Bill
now clearly states that this
should only occur in
exceptional circumstances,
which has improved
consistency with the OECD
guidance on this topic.
A specific provision has been
included that enables the
transfer pricing rules to be
applied where a taxpayer has
received a withholding tax
benefit due to a non-arm’s
length arrangement.
The time limit for amended
assessments will be seven
years, rather than the eight
years proposed in the ED.
Consistent with the ED,
taxpayers must prepare
transfer pricing
documentation by the time of
lodging the income tax
return in order to be able to
establish a “reasonably
arguable position” (RAP) in
respect of their transfer
pricing arrangements;
however, it is no longer
necessary to document “all
conditions”. Conditions do
not need to be documented if
they are not material and
relevant to the application of
the transfer pricing rules.
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The EM explicitly acknowledges
that a range of arm’s length
outcomes may exist in some cases.
Where a single arm’s length point
in the range is most appropriate
and reliable, this should be
referred to; but where all points in
a range are equally appropriate and
reliable then any point in the range
can be taken to be arm’s length.
The new rules will apply to income
years beginning on or after the earlier
of 1 July 2013 or the date the Bill
receives Royal Assent. This means
that taxpayers with a year end of 30
June will need to apply the new rules
from 1 July 2013. Taxpayers with a
March, April or May year end may
need to apply the new rules sooner if
the Bill receives Royal Assent before
the end of their current financial year.
We understand the Government is
targeting passage of the Bill through
Parliament before the close of the
autumn sittings, which conclude on 21
March 2013.
The takeaway
OECD alignment
The Bill’s closer alignment with the
OECD Guidelines is a welcome
improvement. This should provide
greater comfort to multinationals who
prepare global transfer pricing
policies are based on OECD guidance
that they should not need to adopt a
completely different approach for
Australia. That said, global
documentation strategies will need to
take account of the new Australian
requirements in respect of content
and timing.
The initial consultation paper on the
Australian transfer pricing law
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reforms released in late 2011 appeared
to be skewed towards favouring profit
based methods over transactional
methods. The Bill takes a more
balanced approach and it is clear that
the most appropriate and reliable
method should be applied based on
the facts and circumstances of each
case. The question of which method is
most appropriate will no doubt
continue to be a matter of debate in
transfer pricing disputes with the
ATO, but the new rules will not force
the use of profit based methods in all
cases (as had been feared by some
when the reform process began).
The ability to refer to a range of
outcomes when determining the arm’s
length conditions is also welcome.
Based on the commentary in the EM,
it appears that taxpayers may need to
go to some effort to determine
whether the point they have achieved
within an arm’s length range is the
most appropriate outcome, especially
if the quality of some of the
comparable data is questionable.
Recognition of actual dealings
The ED had appeared to provide
broad scope for actual transactions to
be disregarded and/or hypothetical
transactions to be reconstructed in
their place. The Bill and EM now
attempt to limit this to exceptional
circumstances, but how this will be
interpreted by the ATO remains to be
seen.
Documentation and penalties
The documentation rules do not
provide detailed guidance on what
needs to be included in a taxpayer’s
documentation in order to establish a
RAP, so it is likely that guidance from
the ATO will be required on this topic.
Taxpayers will need to assess the
potential risk of adjustment and
penalties when determining the extent
of transfer pricing documentation that
they need to prepare.
During the consultation process there
had been lobbying for de minimis
thresholds to be included based on the
size of a transaction or size of entity,
but this has been rejected. Instead, the
de minimis thresholds proposed in the
ED have been retained. These
thresholds provide relief from
penalties where the tax shortfall from
an adjustment is less than A$10,000
or 1% of tax payable. However, the
practical value of these thresholds is
minimal given that the size of
potential ATO adjustments is not easy
to assess at the time of preparing a tax
return.
Permanent establishments
The rules applying to permanent
establishments will retain the status
quo, which is to only permit
allocations of actual income and
expenditure between a head office and
its permanent establishment. The
Board of Taxation review of the
taxation of permanent establishments
is ongoing and is due to report its
findings in April 2013. It is expected
that this will include a
recommendation on whether
Australia should adopt the Authorised
OECD Approach for branch profit
attribution, which would permit
recognition of notional dealings
between a head office and its
permanent establishment.
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Let’s talk
For a deeper discussion of how this issue might affect your business, please contact:
Transfer Pricing
Nick Houseman, Sydney
+61 2 8266 4647
[email protected]
Pete Calleja, Sydney
+61 2 8266 8837
[email protected]
Sarah Stevens, Melbourne
+61 3 8603 5773
[email protected]
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