The Commissioner of Taxation (the "Commissioner"), on 9 February 2011, issued Taxation Ruling TR 2011/1 dealing with the application of the transfer pricing provisions to business restructuring involving an international related party.
This Ruling represents the finalisation of draft Taxation Ruling TR 2010/D2. To read our Transfer Pricing Insights article on the draft ruling click here. In the article, we listed the information that taxpayers could include in a transfer pricing study designed to demonstrate the consistency of a business restructure with the arm's length principle.
The Ruling provides useful guidance to taxpayers in relation to what the Commissioner expects to see in a transfer pricing study dealing with a business restructure involving one or more international related parties. However, a degree of uncertainty and subjectivity will remain in substantiating the arm's length pricing of business restructures. This is to be expected given the difficulty in 1) finding comparable transactions and 2) making reliable adjustments to make the transactions comparable. This is recognised by the Commissioner where he notes in paragraph 83 of the Ruling: "...The determination of the arm's length consideration involves an element of judgment and is not a precise science. Accordingly, taxpayers and ATO auditors need to approach cases with a degree of flexibility and commonsense, having regard to business and market realities."
When does the ruling apply?
The Ruling applies retrospectively. The Commissioner explains that the Ruling does not require any greater degree of record keeping than was previously required by Taxation Ruling TR 98/11. As highlighted in our previous article, there is no time limit for the Commissioner to make a transfer pricing adjustment. Therefore, taxpayers may need to come to a decision as to how far they want to go back with their business restructuring transfer pricing documentation.
Selection and application of transfer pricing methodology
In selecting the most appropriate transfer pricing methodology or methodologies, the comparable uncontrolled price ("CUP") method should be the most relevant ( Click here for our transfer pricing insight article on the SNF's case which provides a high level explanation of the CUP methodology). This will involve, inter-alia, ascertaining whether any data are available for comparable arrangements entered between independent parties. Taxpayers may find it to their interest to undertake a search of public databases for comparable transactions to determine whether there are any reliable CUPs that may be used.
Where there are insufficient reliable independent comparable data, the Ruling suggests that taxpayers may refer to indicias of arm's length dealing and in particular, options realistically available to the taxpayer, how independent parties would interact in similar circumstances and the consideration of the risk-reward trade-off. It would be expected that contemporaneous documentation (including board minutes, public announcements, communication to employees, correspondence, feasibility studies, business case paper/report, board briefings, cost versus benefit analysis) created during the proposal and implementation stages of the restructure are particularly relevant and important for this analysis.
Relevance of the OECD guidance on business restructuring
Taxpayers may also refer to the OECD report in relation to the transfer pricing aspects of business restructurings approved by the OECD Council on 22 July 2010, as further guidance. However, it is interesting that the Commissioner has removed the following sentence in paragraph 21 of the draft ruling: "The ATO will follow the OECD guidance on business restructuring, once finalised and publicly released, except to the extent that it conflicts with the final Ruling." It would be most helpful to taxpayers if the ATO could provide further guidance on whether there are any specific approaches or areas in the OECD guidance which the ATO has concerns with.
What you can do now
Taxpayers may consider preparing documentation to support past or contemplated business restructures. If you wish to discuss your business restructure documentation requirements or have any queries in relation to this article, please contact Daren Yeoh on (03) 8635 1800.
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