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New Developments in Transfer Pricing Rules
The Australian government has recently released tranche one of its proposed transfer pricing reforms, which are designed to "confirm" that Australia can make transfer pricing adjustments in accordance with its tax treaties with other countries. While the recognition of indirect or profit based transfer pricing methodologies is welcome, the proposed reforms raise significant concerns regarding the retrospectivity of the changes and the extent to which the new powers may be employed by the Commissioner of Taxation to ignore or re-characterise transactions. Taxand Australia examines this first release of proposed transfer pricing reforms with a look at how taxpayers are likely to be affected.
Australia has a domestic transfer pricing provision that was introduced in 1982. The operation of the provision has been the subject of a few recent decisions which have raised concerns, at least for the Australian Taxation Office, that it does not permit resort to indirect or profit based methodologies. Further, while the decisions in those cases have not directly addressed whether the ATO has an independent power to make transfer pricing adjustments under Australia's tax treaties, there have been some judicial comments suggesting that the tax treaties operate more as a "shield" (for taxpayers) rather than a "sword" (for the ATO).
In November last year, the government announced that Australia's transfer pricing rules would undergo a substantial redraft in order to reflect developments in the OECD transfer pricing guidelines and to "confirm" that Australia can make transfer pricing adjustments in accordance with its tax treaties with other countries. On 16 March, the Australian government released an exposure draft of the legislation for "tranche one", being retrospective measures applying from 2004.
Taxand Australia explores the proposed transfer pricing rules in greater detail
While previous decisions of the High Court of Australia have confirmed the power of the parliament to introduce retrospective changes in the law under the Australian constitution, the proposed changes raise legitimate questions about the respect of the government for the rule of law and the level of sovereign risk in Australia.
Alignment of Australia's transfer pricing regime with the arm's length standard under OECD guidelines may be desirable for international consistency, however the concern is that the Australian Taxation Office will seek to use the changes to re-characterise transactions according to some vague notion of commercial reality. Indeed, the proposed changes include special provisions which allow the ATO to determine the interest rate on loans based on a "commercial" level of debt, even if the level of debt is otherwise within the 3:1 debt to equity ratio effectively permitted under Australia's thin capitalisation rules.
At a minimum, it will be necessary for taxpayers to review their transfer pricing documentation going back to 2004 to ensure that it is consistent with OECD guidance.
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