On 24 May, the Government introduced into Parliament the first piece of draft legislation in its reform of Australia’s transfer pricing provisions.
This legislation is the culmination of the Government’s consultation to date on this subject, including the release of an exposure draft and the receipt of submissions. The draft legislation deals unequivocally with the “clarification” that Australia’s tax treaties provide an independent and stand-alone ability to impose transfer pricing adjustments.
The Treaties are not merely a mechanism to relieve double taxation. The Bill also introduces into Law the ATO’s interpretation of the interaction between the transfer pricing and thin capitalisation provisions and the interpretive use of OECD material. We expect this will be the first of several rounds of new legislation in the government’s reform of the transfer pricing regime.
- The draft legislation retains many of the key features of the exposure draft, while incorporating additional aspects in response to the consultation process.
- While the justification for the introduction of the retrospective legislation is still highly questionable, the legislation will at least provide some certainty to taxpayers of the shape and operation of the new regime. The key aspects of the Bill are as follows:
- Legislative clarification that tax treaties provide an independent power to make transfer pricing adjustments. This clarification is effective from 1 July 2004. The provisions will only be applicable to transactions involving a country with a Double Tax Agreement with Australia which incorporates a relevant business profits article, or an associated enterprises article
- The amount of the adjustment will be determined by reference to a “transfer pricing benefit”. This refers to the difference between the amount of profit that would have been made using the arm’s length principle, and the amount actually made
- The Commissioner must make a determination to adjust the tax position to negate this benefit. Where no profit has been made, the Commissioner can make a determination to impose an arm’s length profit
- The profit of permanent establishments will be based on if the permanent establishment is a “distinct and separate” enterprise
- The interaction between the thin capitalisation regime and the transfer pricing rules as set out in TR2010/7 has been legislated
- The use of OECD guidance (including the 2010 Transfer Pricing Guidelines) for years commencing after 1 July 2012 for the interpretation of the provisions will be mandated. For prior years a taxpayer must use the relevant OECD material in force at the time
- The restated interpretation of the arm’s length principle remains focused on taxing “economic contribution” and “profits”, rather than applying the arm’s length principle to individual transactions. The clear implication of this approach is that transactions can no longer be viewed in isolation, but must be viewed in terms of the contribution to the group as a whole
- Provisions are included which allow for consequential adjustments that may be the result of transfer pricing adjustments e.g. WHT.
In addition to the features discussed in the exposure draft, the draft legislation incorporates the following new aspects:
- Existing settlements and agreements made to date with the Commissioner will be protected from adverse adjustment
- The imposition of additional penalties beyond that which would have existed under the current interpretation of Division 13 and the DTA’s will not occur. That is, the penalty under Division 815 will be limited to that which could have been assessed had Division 815 not been enacted
- Where an entity is in a loss making position by virtue of non-arm’s length pricing, multiple transferpricing benefits may be seen to have accrued to the entity - the first to negate the loss and the second to attribute taxable income to the taxpayer.
The table below illustrates the key differences between the current regime and the new regime, in so far as it is addressed by the draft legislation.
The changes occurring in the transfer pricing arena are complex and ongoing. In particular, taxpayers may be subject to multiple regimes operating concurrently. In light of the impending introduction of the draft legislation, it is absolutely critical that taxpayers review their transfer pricing policies. Conducting a transfer pricing risk assessment will determine if additional work is required to mitigate any latent transfer pricing risks. Specifically, taxpayers should ensure transactions are not only viewed in isolation, but as part of the overall contribution to the group to ensure the requirements now expected by the Government are met. Consequently, existing supportive contemporaneous documentation may need to be modified or reworked.
This documentation and risk assessment process will require a review, not only of the historical and current position, but also of the adequacy of policy operation in the the future.
For further information please contact
Anthony Hayley, Associate Director
Global Transfer Pricing
RSM Bird Cameron
T +61 3 9286 1993