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The decision in SNF (Australia) Pty Ltd v. Commissioner of
Taxation [2010] FCA 635 is good news for Australian businesses
with international operations. It is the first Federal Court
decision handed down on substantive transfer pricing issues.
However, the case highlights the Tax Office's hard-line
approach to transfer pricing. The case also demonstrates the Tax
Office's preference to use the statistics-driven
"transactional net margin method" (TNMM)
to establish prices between international related parties.
SNF's transfer pricing issue
SNF was importing products from related companies in France,
China and the United States.
The Tax Office considered SNF was paying amounts that were
greater than "arms length", and therefore reducing
SNF's taxable income in Australia.
The Tax Office based its case around the argument that SNF had
returned losses for each of the income years. This was supported by
a TNMM analysis that found that taxpayers with a comparable
business profile returned an average net margin of 1.7% for the
relevant income years. On this basis, the Tax Office concluded that
SNF was paying too much for the imported goods.
SNF argued that its overseas suppliers had made sales to
independent parties that were comparable to the transactions made
with SNF in Australia. SNF contended that these sales established a
"comparable uncontrolled price" (CUP) that was equal to
or that exceeded the price paid by SNF in Australia.
This demonstrated SNF was not paying too much for the goods it
imported from related parties. SNF also explained that it sustained
losses due to competition in the Australian market, excessive stock
levels, below average sales per salesperson and poor management
decisions.
Decision of the Federal Court
The Federal Court accepted SNF's arguments, and in
particular, its use of the CUP method. Middleton J stated that
where there are transactions that establish a comparable
uncontrolled price, these should be preferred to relying on the
TNMM. He stated:
"In my view undertaking the
TNMM does not provide a proper basis for determining what
consideration it was reasonable to expect that an independent
purchaser would pay for the products. The TNMM does not address the
issue as is required by Div 13 of the ITAA, as interpreted earlier
in these reasons. I reject the use of applicability of the TNMM as
contended for by the Commissioner in the context of applying Div
13."
His Honour also agreed with the comments of Downes J in
Roche Products Pty Limited v Commissioner of Taxation
[2008] AATA 639, who noted that the TNMM attributes all losses to
transfer pricing, regardless of whether there were other
circumstances that actually caused or contributed to those
losses.
The taxpayer won - do you need to do anything?
The case highlights that the Tax Office continues to take issue
with businesses recording losses where they have international
related party transactions.
The Commissioner attacked the reliability of SNF's
comparable transactions. Businesses should be careful that, when
establishing a transfer price, their "comparables" are
the same or similar to the related party transactions and that
appropriate adjustments are made.
Businesses also need to ensure that there is sufficient
documentation in place to protect their transfer pricing policies.
This becomes more important in the wake of the slowdown of the
global economy, in the context of falling sales volumes and falling
profits. Maintaining this documentation is particularly relevant
for transfer pricing matters, as there is no limitation period for
the Tax Office to amend assessments.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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