The Benchmark - November 2011 alert
Wednesday, 2 November 2011
The Australian Government made two reform announcements yesterday in relation to transfer pricing: one retrospective and one forward looking.
The Assistant Treasurer, the Honourable Bill Shorten, announced the Government’s intention to amend the law to assert its position that the transfer pricing rules in Australia’s Tax Treaties operate independently from the domestic transfer pricing provisions. The amendment will apply from 2004.
It is clear that the outcome of recent litigation is the impetus for this change. The decisions in the cases of Re Roche and SNF Australia highlighted the court’s view on how Australia’s transfer pricing provisions operate, which is arguably out of line with international practices.
Deloitte commented at the time of the SNF Australia decision earlier this year that it would be game changing and the Government’s reaction to amend the law will not come as a surprise to many taxpayers.
Along with a media release on the law change, Treasury also issued a Consultation Paper canvassing a range of potential changes to the transfer pricing rules on which it is inviting comment. Differing interpretations on current transfer pricing rules have created uncertainty for local and foreign multinationals operating in Australia, and in that context the proposed consultation process is timely.
The Government is seeking reform to the transfer pricing rules to bring them into line with international best practice, as per the OECD’s Transfer Pricing Guidelines on the application of the internationally accepted arm’s length principle. In this regard, the Government recognises that the current rules in Division 13 of the income tax laws, which date to the early 1980s, are now out of date and that any resulting inconsistency with current international standards is not in Australia’s best interests.
The stated policy objective is therefore not just to limit the erosion of the tax base through profit shifting but also to ensure the rules do not inhibit Australia’s attractiveness as a destination of investment and new business activity.
With this in mind, the headline reform suggested in the Consultation Paper is to change Division 13 so that: it reflects the internationally accepted arm’s length principle; it gives outcomes consistent with the rules in Australia’s tax treaties; and, the OECD Guidelines are directly applicable to its interpretation. In this regard, the paper proposes a principle-based legislative design with the following key features:
- The current Division 13 focuses on pricing individual transactions, while the revised rules will be broadened to determining an arm’s length outcome for the overall arrangements between the parties
- Alignment to changes in the 2010 OECD Guidelines, which endorse a ‘most appropriate method’ rule giving greater recognition to profit-based methods
- The revised rules could legislate a most appropriate method rule, along with guidance on determining the most appropriate method and determining comparability in applying arm’s length pricing methods (consistent with the OECD Guidelines).
Other important matters raised in the paper are:
- Consistent with Australia’s self-assessment regime, the revised rules would oblige taxpayers to comply with the arm’s length principle
- The view that a broad discretion, such as that in the current subsection 136AD(4) of Division 13 for the Commissioner to deem an arm’s length consideration, is inconsistent with self-assessment and could be replaced with a more limited discretion for cases involving insufficient information and reconstruction of non-arm’s length arrangements
- That there should be a legislative requirement that taxpayers have contemporaneous documentation to evidence compliance with the arm’s length principle (incorporating a de minimis rule), with specific penalties applying for failure to keep such documentation
- Consideration will be given to removing current indefinite time limits for transfer pricing adjustments.
The paper also raises the issue of inconsistencies between Australia’s current approach to profit attribution to branches and the OECD’s ‘functionally separate enterprise’ approach, which will be of keen interest to the financial services sector. The paper invites comment on this issue, but notes this will be treated as a separate policy question to the other issues it raises.
Submissions on the Consultation Paper are due by 30 November 2011. In preparing Deloitte’s submission, we will be actively seeking the views of anyone interested in or affected by these important reforms, as it will be critical for Australian taxpayers that the new legislative regime is robust and well considered. We welcome your comments or any questions you may have.