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Australian Transfer Pricing Law Reform

New retrospective transfer pricing legislation passed by Parliament

Australian Transfer Pricing Law Reform21 August 2012

The Government has accomplished a significant part of its agenda for reforming Australia's transfer pricing rules, by amending the Income Tax Assessment Act 1997 to include new Subdivision 815-A ("treaty-equivalent cross-border transfer pricing rules"). The legislation, passed by Parliament on 20 August 2012 and now awaiting Royal Assent, is substantially the same as the Exposure Draft legislation released for public comment in March 2012.

Purpose of the retrospective transfer pricing rules

Subdivision 815-A's primary purpose is to ensure that the transfer pricing articles in Australia's tax treaties (the Associated Enterprises and Business Profits Articles) can be applied as an assessment power independent of Division 13 of the Income Tax Assessment Act 1936. In a nutshell, Subdivision 815-A authorises the ATO to tax a "transfer pricing benefit", which is essentially the amount of profit which would, but for non-arm's length conditions, be allocated to an Australian entity or permanent establishment under a transfer pricing article in an applicable tax treaty. 

Subdivision 815-A has effect for years of income commencing on or after 1 July 2004, with the retrospective application of the new legislation being its most controversial feature. The Government views the legislation as a revenue protection measure, pointing to the need to address uncertainties as to the operation of the existing transfer pricing laws, particularly following last year's Federal Court decision in the SNF Australia case.  

Practical implications of the retrospective transfer pricing rules

Key points to note regarding Subdivision 815-A's practical implications for taxpayers are:

  • Australia's transfer pricing rules now comprise three sets of provisions: new Subdivision 815-A, as well as the existing laws in Division 13 and the treaty transfer pricing articles. All apply fundamentally the same arm's length principle, although differences in wording between Division 13 and the other provisions create the potential for differing outcomes. The ATO is expected, where possible, to rely on all three of the provisions in the alternative to support transfer pricing adjustments

  • Subdivision 815-A doesn't give the ATO any more power to make transfer pricing adjustments than it believes it already had under existing law. This is consistent with the Government's repeated statements that it is only "clarifying" the existing law as regards the treaty transfer pricing articles being an assessment power independent of Division 13

  • The major impact of the retrospective law is on those taxpayers with ongoing ATO transfer pricing audits. The ATO has indicated that it has 40 such cases involving transfer pricing adjustments worth $1.9 billion in tax. For those taxpayers, the ATO now has legislative backing for what were previously only arguable views

  • Other taxpayers potentially affected by the law's retrospective application are those at risk of an ATO audit in respect of the 2004 to 2012 years. Factors that may place taxpayers at risk of an ATO audit include persistent losses, global restructures, or significant related-party debt expenses

  • Subdivision 815-A significantly strengthens the ATO's position for its views on issues, such as its power to use profit methods to make transfer pricing adjustments, its power to require commercially realistic outcomes in the taxpayer's circumstances, and its power to reconstruct transactions (such as pricing related-party debt by reference to arm's length debt amounts)

  • Subdivision 815-A explicitly requires that it is interpreted consistently with relevant OECD guidance. This should help ensure that the ATO cannot depart from internationally accepted principles and approaches in applying the new provisions

  • From 1 July 2012, Australian taxpayers engaging in cross-border transactions with related parties in countries which have a treaty with Australia will need to be aware of the implications of Subdivision 815-A. In particular, these taxpayers' transfer pricing policies, processes and records will need to have regard to OECD transfer pricing guidance. For many taxpayers, this is likely to be business as usual

  • Subdivision 815-A includes a provision dealing with its interaction with Australia's thin capitalisation regime in Division 820 ITAA 1997, by essentially adopting the ATO's position in Taxation Ruling TR 2010/7

  • The ATO has publicly announced that it won't retrospectively apply Subdivision 815-A to re-open settled cases, including concluded audits, agreed Advance Pricing Arrangements and settled treaty Mutual Agreement Procedures (MAP)

  • As Subdivision 815-A only applies in treaty cases, MAP should be available for taxpayers to obtain relief for any resulting double taxation, although MAP does not guarantee relief and some other countries may have a statute of limitations that precludes relief for adjustments to early years

  • There is no additional penalty exposure on a retrospective application of Subdivision 815-A. The amount of any penalty is the same as if Subdivision 815-A had not been enacted, and is therefore limited to the amount imposable on the application of Division 13 or the treaty transfer pricing article.

Next phase of Australian transfer pricing reform

The Subdivision 815-A amendments are the first stage of the Government's transfer pricing reforms. Further amendments are proposed to prospectively replace the current Division 13, for which Exposure Draft legislation is expected shortly. Key changes likely to be introduced are a mandatory transfer pricing documentation requirement, a limitation of the years available to the Commissioner to make transfer pricing adjustments, and the adoption of a self-assessment regime for transfer pricing. Also under consideration is a proposal to bring Australia's permanent establishment profit attribution rules fully into line with the current OECD-endorsed approach.

Deloitte transfer pricing contacts

John Bland
Partner | Deloitte Tax Services Pty Ltd
Direct: +61 7 3308 7275

Fiona Craig
Partner | Deloitte Tax Services Pty Ltd
Direct: +61 2 9322 7770

Geoff Gill
Partner | Deloitte Tax Services Pty Ltd
Direct: +61 2 9322 5358

David Grecian
Account Director | Deloitte Tax Services Pty Ltd
Direct: +61 3 9671 7284

Soulla McFall
Partner | Deloitte Tax Services Pty Ltd
Direct: +61 3 9671 7814

Paul Riley
Partner | Deloitte Tax Services Pty Ltd
Direct: +61 3 9671 7850

Marc Simpson
Principal | Deloitte Tax Services Pty Ltd
Direct: +61 3 9671 7176

Cam Smith
Partner | Deloitte Tax Services Pty Ltd
Direct: +61 3 9671 7440

Jacques Van Rhyn
Partner | Deloitte Tax Services Pty Ltd
Direct: +61 8 9365 7122

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