On 16 April 2014, the Australian Taxation Office (ATO) published its Transfer Pricing Guidance Package. It contains two draft taxation rulings and two draft transfer pricing statements. These documents are intended to provide guidance for the application of the new transfer pricing legislation that entered into force in July 2013. This new legislation brought Australia’s transfer pricing rules more in line with OECD transfer pricing guidelines The guidance package covers three important aspects of the new transfer pricing legislation.
First of all, the new transfer pricing legislation ensures reduced penalties in case of an adjustment for tax payers that maintain sufficient contemperaneous transfer pricing documentation. Documentation prepared after the tax return has been submitted is inadmissible. Documentation that is not immediately available is not contemperaneous and documentation that does not relate to the entity in question can be deemed irrelevant (i.e. global studies).
Secondly, the new transfer pricing legislation specifies what kind of documentation must be maintained in order for the taxpayer to be able to claim their transfer pricing is based on a reasonably arguable position. Failure to comply with these requirements means the penalty will be set at a minimum of 25% of the adjustment.
Thirdly, and most importantly, the new transfer pricing legislation confirms the authority of the tax authorities to reconstruct actual transactions. This reconstruction power can be invoked where the economic substance of the transaction is not aligned with its form, where independent parties would have entered a different arrangement or not entered the arrangement at all. Reconstructing a transaction is contemplated by the OECD guidelines in exceptional circumstances, however, Australia goes much further than what the OECD deems appropriate. The OECD guidelines provide the authority to reconstruct transactions under special circumstances. The new
transfer pricing legislation adopted in Australia gives the tax authorities the authority and ability to use these powers and will likely do so on a regular basis.