ATO continues the focus on transfer pricing and puts the heat on business restructures
Recent ATO transfer pricing activity, together with the ATO’s 2012-13 compliance program, confirms that transfer pricing remains a key area of ATO focus for both the large business and small-to-medium enterprises (SMEs) segments.
Key actions for taxpayers
With the ATO’s continued focus on transfer pricing compliance, increased disclosure requirements under the new International Dealings Schedule (IDS) and Reportable Tax Positions (RTP) schedule, and current reforms to the Australian transfer pricing rules, it is increasingly important for taxpayers to develop robust transfer pricing policies and governance frameworks to support international related-party arrangements, and to maintain contemporaneous transfer pricing documentation to demonstrate arm’s length pricing outcomes.
Key transfer pricing elements of the 2012-13 compliance program and their link to other ATO transfer pricing-related activities are summarised below.
For large businesses, the ATO will conduct 25 reviews and 29 audits associated with transfer pricing, together with 15 mutual agreement procedures (which aim to provide relief from double taxation that may result from transfer pricing adjustments). The ATO will also continue to offer Advance Pricing Arrangements (APAs) as a risk mitigation tool for taxpayers, with 40 APAs planned for large businesses in the 2012-13 year.
Large business corporate restructures will continue to be a key area of focus for the ATO, particularly where it perceives that multinationals are seeking to structure their operations to maximise the proportion of their returns in low-tax jurisdictions and where tax outcomes do not reflect the economic substance of the arrangement. While not specifically mentioned in the compliance program document, it is understood that the ATO will be undertaking a new compliance project focused wholly on business restructures. This activity follows the ATO reviews undertaken under the recent Strategic Compliance Initiative (SCI) for transfer pricing, which included targeting taxpayers for restructuring their Australian operations. Now that the ATO’s ruling on business restructures (Taxation Ruling TR2011/1) has been in place for some time, the ATO is looking to examine further the way in which taxpayers deal with business restructures from a transfer pricing perspective. Selection of cases for the project will certainly be aided by the additional information now collected by the ATO through the new IDS; selected cases are expected to include transfers of intangible property, the use of hub operations in low-tax jurisdictions for the performance of centralised activities, such as marketing, procurement and services, and the implementation of limited-risk structures in Australia.
The use of complex or novel financial arrangements that are not supported by a business need will also draw ATO scrutiny under the 2012-13 compliance program. Further, the ATO highlights concerns regarding debt levels, particularly where taxpayers use revalued asset bases to support debt amounts within the thin capitalisation safeharbour. The ATO’s compliance activities in this area will include use of the arm’s length debt test.
Small to medium enterprises
The ATO sees transfer pricing as a continuing compliance risk for SMEs. Accordingly, the ATO plans to undertake 25 transfer pricing reviews, 8 transfer pricing audits, and to contact at least 200 SMEs, addressing a range of international tax issues, including those associated with international shipping operations. The ATO will also contact SME taxpayers on reporting obligations related to the new IDS, which requires taxpayers to disclose information regarding their international related-party dealings and the level of transfer pricing documentation held to support the arm’s length nature of those dealings. The 2012-13 compliance program also emphasises the value of the simplified APA product available to SME taxpayers as an avenue to manage transfer pricing risk and gain certainty in respect of future transfer pricing arrangements.
ATO compliance approach – real time reviews and international cooperation
The ATO will continue to select taxpayers for transfer pricing and broader tax reviews based on its risk differentiation framework (RDF), which seeks to categorise taxpayers according to certain risk indicators. The new IDS together with the RTP schedule, which requires disclosure of uncertain tax positions, will provide the ATO with more information than ever before regarding a taxpayer’s transfer pricing arrangements and key risks, and will be key tools used in selecting taxpayers for examination. Armed with additional information, the ATO will be more focused on real-time reviews and pre-lodgement reviews as part of its 2012-13 compliance approach. High-risk indicators associated with transfer pricing typically include a high proportion of international related-party dealings relative to the size of the business, persistent losses or low profit levels relative to industry benchmarks, and certain high-risk transaction types or arrangements, such as business restructures or hybrid debt instruments. Loss-generating branch operations are likely to be another area of focus. A specific question has been included in the IDS on international related-party dealings involving branch operations, which will provide the ATO with additional information in respect of such dealings.
The ATO will also rely on additional measures to identify taxpayers for review, including information from the Australian Transaction Reports and Analysis Centre (AUSTRAC) regarding international transactions and money flows with certain tax jurisdictions.
Moreover, the ATO will continue to focus on global cooperation and information sharing with other tax authorities, through bodies such as the Joint International Tax Shelter Information Centre (JITSIC). The ATO’s compliance approach for transfer pricing will likely also include the continued use of joint transfer pricing audits. Such joint audits, while a focus of the ATO in developing ‘best practice’ international tax administration and improving its knowledge, have proven to be complex from a process perspective as the ATO navigates the minefield of permissible information sharing under the terms of the relevant tax treaty. It appears likely that future selected cases will involve a broad set of international tax issues, including transfer pricing, where there are tax risks perceived by both tax administrations. To date, the ATO’s joint transfer pricing audits have been performed with the US Internal Revenue Service.