Australia has elevated its attack on global transfer pricing, however challenges and difficulties remain in the practical application of the proposed new transfer pricing laws.
OVERVIEW AND BACKGROUND
In late 2012, the Australian Government released exposure draft legislation dealing with the second instalment of Australia's updated/revised Transfer Pricing Rules (TP Rules). The proposed second instalment of our TP Rules is contained in draft Subdivision 815-B to Subdivision 815-E of the Income Tax Assessment Act 1997(Cth) (ITAA 97).
The second instalment of our TP Rules is intended to complement and update the amendments contained in Subdivision 815-A of the ITAA 97, which passed into law in September 2012. While Subdivision 815-A dealt with assessing powers under the equivalent of our Double Tax Treaties, the second instalment of our TP Rules deals more broadly with both treaty and non-treaty countries.
Briefly, if enacted the draft legislation would repeal our existing domestic Transfer Pricing Provision, Division 13, and would 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 Cooperation and Development's (OECD's) approaches.
The second instalment of our TP Rules would significantly enhance the Australian Taxation Office's (ATO's) armoury to pursue Transfer Pricing audits and litigation. In releasing the draft legislation, the Assistant Treasurer made specific reference to perceived abusive tax practices, including the use of Dutch/Irish investment vehicles and specific taxpayer activities, including Apple Inc., Google Inc. and Amazon.com, Inc.
CONCERNS AND CHALLENGES
However, there will be significant challenges and difficulties for both taxpayers and the ATO in practically applying the proposed second instalment of our TP Rules, including, amongst other things:
- Questions arise as to whether the statutory language or text used in parts of the draft legislation is consistent with and/or achieves the intent reflected in the accompanying Second Reading Speech and particularly the Explanatory Memorandum (Accompanying Aids). In Commissioner of Taxation v Consolidated Media Holdings Limited  HCA 55 at para 39 (5 December 2012), the High Court recently 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 the OECD guidance contained in the OECD Model Tax Convention, its commentaries and the OECD Transfer Pricing Guidelines are all helpful, heavy reliance can create an element of uncertainty. As the name suggests, these guidelines are 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 "permanent establishments".
- The interaction of Division 820 as the regime dealing with thin capitalisation and the second instalment of 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. This creates a circular approach and potentially a duplication of process, particularly with the arm's length thin capitalisation method.
- According to the Explanatory Memorandum (para 1.18 and 1.48), Subdivision 815-A will have no operation from the date of application of these changes/amendments. It is unclear how this proposed change to Subdivision 815-A will be facilitated, to what extent and whether it will be repealed as it is intended for Division 13.
- The Amendment of an Assessment can be made within eight years of the original Notice of Assessment.
It is anticipated that the second instalment of our TP Rules will have a significant impact on all global businesses, including both inbound and outbound investors. The particular focus of the Assistant Treasurer has been on e-commerce, the digital economy and other IT 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.
HIGHLIGHTS OF SECOND INSTALMENT OF OUR TP RULES
The highlights of the draft legislation contained in the second instalment of our TP Rules 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 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/head office (Subdivision 815-C).
- Particular focus on identifying and substituting arm's lengths conditions and in identifying comparability of circumstances and the economic substance of 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 transfer pricing methods to be used, including based on the degree of comparability and availability of reliable information.
- Direct guidance to be provided by the Transfer Pricing Guidelines issued by the OECD.
- 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 eight years - a significant 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 affairs (Subdivision 815-D) in order to sustain a "reasonably arguable position" and minimise penalties.
- Special rules for trusts and partnerships - ie treated in the same way as other entities (Subdivision 815-E).
While the recent reform of Australia's TP Rules was initially driven by the decisive taxpayer win in SNF (Australia) Pty Limited  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 e-commerce.
Australia has recently established a Specialist Reference Group comprising government, business representatives, tax professionals, academics and community representatives to examine tax minimisation by multinational enterprises and concerns and risks to Australia's corporate tax base; refer to the Assistant Treasurer's media release of 10 December 2012 for more information.
While submissions on the second instalment of our TP Rules closed on 20 December 2012, we would expect the draft legislation to progress (perhaps with amendments) and to be introduced into the Australian Parliament in the upcoming Autumn sittings of Parliament. Although Australia has entered an election year, we would expect the second instalment of our TP Rules to be passed into law during the course of 2013.
© DLA Piper
This publication is intended as a general overview and discussion of the subjects dealt with. It is not intended to be, and should not used as, a substitute for taking legal advice in any specific situation. DLA Piper Australia will accept no responsibility for any actions taken or not taken on the basis of this publication.
DLA Piper Australia is part of DLA Piper, a global law firm, operating through various separate and distinct legal entities. For further information, please refer to www.dlapiper.com