Australia intensifies attack on Global Transfer Pricing: New Transfer Pricing Legislation introduced along with expanded General Anti-Avoidance Provisions
OVERVIEW AND BACKGROUND
On Wednesday 13 February 2013, the Australian Government introduced into Parliament a new package of integrity measures including modernised and expanded Transfer Pricing Rules (TP Rules) and revised General Anti-avoidance Rules - the latter is known as Part IVA. These integrity measures are contained in Taxation Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Bill 2013.
The TP Rules provide a new and comprehensive transfer pricing regime and are principally outlined in the new Subdivision 815-B, C and D of the Income Tax Assessment Act 1997 (Cth) (ITAA 97). These TP Rules will complement and ultimately supplant the treaty equivalent transfer pricing assessing powers contained in Subdivision 815-A, which passed into law in September 2012.
Briefly, the TP Rules will provide a more specific and targeted Transfer Pricing Regime dealing with, amongst other things, the tax position of permanent establishments, a self-assessment regime, specific transfer pricing documentation requirements and rules more specifically aligned to the Organisation for Economic Co-operation and Development's (OECD's) approaches. These TP Rules apply to dealings with both treaty and non-treaty countries. As a consequence of the introduction of the TP Rules, our existing domestic Transfer Pricing Provision, Division 13 will be repealed.
These TP Rules will significantly enhance the Australian Taxation Office's (ATO's) armoury to pursue Transfer Pricing audits and litigation. Further the TP Rules have been introduced at a time when the Australian Treasurer has called for much greater cooperation between nations to monitor multinational tax planning, close tax loopholes and improve transparency and disclosures of business activities. This approach is consistent with the broader approach being adopted globally by many developed nations, including at the G20 Finance Ministers' meeting in Moscow and evidenced by the issue of a Communique at the conclusion of the meeting on 15 and 16 February 2013. On 12 February 2012, the OECD also released a Report Addressing Base Erosion and Profit Shifting on multinationals' tax strategies and will work towards developing an action plan to enhance cooperation of governments in tackling base erosion of our global corporate tax systems.
HIGHLIGHTS OF THE NEW TP RULES
The highlights of the recently introduced Subdivision 815-B, C and D and related legislation are as follows:
- Greater focus on a profits-based approach (including gross margin, net profit and the division of profits) rather than identifying principally comparable uncontrolled prices and the new TP Rules are very supportive of the OECD approaches and pricing methodologies.
- Separate rules apply to identify arm's length conditions between different entities (Subdivision 815-B) and permanent establishments (PEs)/head office (Subdivision 815-C). A new concept of 'arm's length profits' has been introduced to specifically deal with attributing profits to a permanent establishment in Subdivision 815-C.
- Particular focus on identifying and substituting arm's lengths conditions and on identifying comparability of circumstances based on the particular commercial or financial relationsassociated with each arrangement. This will allow the Commissioner greater powers to pursue business restructures, re-characterise transactions and re-allocate profits.
- Determination of the most appropriate and reliable TP methods to be used, including based on the degree of comparability and availability of reliable information.
- Direct guidance is to be provided by the Transfer Pricing Guidelines issued by the OECD and the OECD Model Tax Convention on Income and on Capital and its Commentaries.
- Modification of our domestic thin capitalisation rules and in certain circumstances, determining the arm's length amount of debt under our Transfer Pricing Rules.
- Limiting amendments under these Transfer Pricing Provisions to seven years - asignificant concession compared to the unlimited amendment period under Division 13.
- Operate as a self-assessment regime rather than requiring the Commissioner of Taxation's determination under Division 13.
- Introduction of specific record keeping requirements for transfer pricing in order to sustain a "reasonably arguable position" and to minimise penalties.
- No tax avoidance purpose is required in order for the TP Rules to apply.
- Special rules for trusts and partnerships (Subdivision 815-D).
- Subdivision 815-A will have no operation from the date of application of the new TP Rules, expected to be from 1 July 2013. Thus, Subdivision 815-A will apply from 1 July 2004 to 30 June 2013, and thereafter the new TP Rules will apply.
GLOBAL FOCUS AND IMPACT
It is anticipated that the TP Rules will have a significant impact on all global businesses, including both inbound and outbound investors. The particular focus of the Treasurer and Assistant Treasurer has been on e-commerce, the digital economy and other information technology-related sectors. However, all multinationals are on notice of Australia's increasing transfer pricing focus and legislative armoury. Further, recent statements by governments in the UK, France, India, China, New Zealand and the US on Transfer Pricing and related multinational tax planning confirm the need for proper attention to and careful planning on international transactions.
CONCERNS AND CHALLENGES
There will however be significant challenges and difficulties for both taxpayers and the ATO in practically applying the TP Rules, including, amongst other things, the following:
- Questions arise as to whether the statutory language or text used in parts of the legislation is consistent with and/or achieves the intent reflected in the accompanying Second Reading Speech and particularly the Explanatory Memorandum (Accompanying Aids). Recently in Commissioner of Taxation v Consolidated Media Holdings Limited (2012) HCA 55 at para 39 (5 December 2012), the High Court has re-emphasised the paramount significance of the words of the statute (the text) and that the legislative history and extrinsic materials cannot displace the meaning of the statutory text.
- Though helpful, heavy reliance on the OECD guidance contained in the OECD Model Tax Convention, its commentaries and the OECD Transfer Pricing Guidelines can create an element of uncertainty. These guidelines are as they suggest, just guidelines and are limited in their certainty of practical application, particularly with specific issues including proposed re-characterisation of transactions, debt/equity treatment and increasing debate as to the appropriate approach to PEs.
- The interaction of Division 820 as the regime dealing with Thin Capitalisation and the TP Rules provides challenges in analysing the impact on certain financing arrangements. Similar to Subdivision 815-A, it is intended that the TP Rules be applied first, followed by Division 820 (where applicable) to potentially reduce debt deductions creating a circular approach and potentially duplication of process, particularly with the arm's length thin capitalisation method.
While the recent reform of Australia's TP Rules was initially driven by the decisive taxpayer win in SNF (Australia) Pty Limited (2011) FCAFC 74 and the fact that the TP Rules are seen as critical to the integrity of the Australian tax system, Australia is very much a part of the global focus on perceived tax minimisation strategies adopted by multinational enterprises, particularly involving global technology companies, banks and other financial services provides, funds managers, distributors and those increasingly involved in ecommerce. This has been reinforced by recent G20 and OECD initiatives.
Although Australia has entered an election year, we would these TP Rules to be passed into law during the course of 2013.
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