On 1 November 2011, the Assistant Treasurer, Bill Shorten,
released a consultation paper addressing proposed reform of
Australia's transfer pricing rules with the objective of
making those rules consistent with international standards. Some
reform is to apply to income years commencing on or after 1 July
2004! The Government says that its objective is to improve the
integrity and efficiency of the tax system and to minimise
profit-shifting between multinational enterprises.
Since the introduction of transfer pricing rules in Division 13
of the Income Tax Assessment Act 1936 (Act) nearly 30 years ago,
there has been little change to the legislation. During this time,
at the international level, transfer pricing has been evolving. In
2010 the Organisation for Economic Co-operation and Development
(OECD) released revised Transfer Pricing Guidelines for
Multinational Enterprises and Tax Administrations reflecting
changes to the internationally accepted approach to transfer
pricing. The Federal Government is, in large measure, using these
changes to justify the present proposed 'reform'.
The Commissioner of Taxation in his 2011 Annual Report voiced
concern at the effectiveness of Division 13 and recommended a
modernisation of the Act. The lack of uniformity between
Australia's domestic transfer pricing rules with the
OECD's current thinking was highlighted in the
Commissioner's Annual Report particularly in reference to
the Full Federal Court decision of FCT v
SNF. In light of this decision (and the earlier
Roche Products decision) the Government
has recognised that Australia's current transfer pricing
rules may not be interpreted in a way that is consistent with
In particular, the Government has stated that it will address
the uncertainty regarding whether tax treaties have the power to
enforce transfer pricing adjustments independent of our domestic
transfer pricing legislation. This is an area of concern as many
believe the purpose of a tax treaty is to act as a
'shield' against double taxation and not as a
'sword' (or separate taxing mechanism).
The 'reform' that the Government is addressing will,
we expect, largely focus on endorsing the ATO historic approach
which is to focus upon "profitability" or 'commercial
outcomes' of an organisation and less on the"
pricing" of individual transactions or groups of transactions.
Taxpayers should therefore anticipate an invigorated ATO in
applying profits-based methods and the application by the ATO of
their so-called "commercial realism" test when reviewing
a taxpayer's financial performance for income years
commencing on or after 1 July, 2004.
Multinational enterprises that have sought comfort from the
outcomes of the SNF and Roche
Products cases, indeed most taxpayers with
significant international related party transactions and no
protection (such as an Advance Pricing Arrangement) should consider
reviewing their transfer pricing documentation to ensure that the
outcomes achieved are commercially realistic and/or justified have
regard to ATO or other appropriate benchmarks.
Moore Stephens has developed a specialised software based
Transfer Pricing Risk Assessment Tool Kit ("TP Toolkit")
which can be used by multinational enterprises to determine whether
their operating performance appears commercially realistic having
regard to ATO benchmarks. For more information regarding the TP
Toolkit, please contact Daren Yeoh on 03 8635 1994 or Stuart
Edwards on 8635 1967.
Interested parties should make a submission to Treasury on or
before 30 November 2011. In this regard we note that Moore Stephens
will be making a submission to Treasury in relation to the
consultation paper and we encourage taxpayers that would like to
contribute to this submission to email Stuart Edwards with details
of their issues or concerns. Stuart may be contacted via email at:
Exemptions or concessions on stamp duty could apply when contemplating the purchase or transfer of NSW real estate.
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