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Retrospective operation of TP law reforms
In 2012 the inclusion of Subdivision 815-A in the Income Tax Assessment Act meant amendments were made to Australia's transfer pricing (TP) laws which affected income years commencing on or after 1 July 2004, 8 years previous. Taxand Australia discovers why retrospective laws, such as Subdivison 815-A, can be controversial.
Is Subdivision 815-A retrospective law?
The Australian Government has argued that Subdivision 815-A merely clarifies the existing law, rather than introducing new powers of taxation, and therefore has no retrospective application. The Australia Taxation Office (ATO) has long held, and has publicly expressed, its view that DTA transfer pricing rules provide an alternative basis for transfer pricing adjustments. However this view was not always shared by commentators, advisers and taxpayers, and therefore Subdivision 815-A has been argued to have retrospective effect. However the position had not been tested before a court.
Does Parliament have the power to make retrospective law?
Parliament clearly has power to make retrospective law in Australia. However Parliament has expressed its intention that retrospective changes should not be made lightly and, generally, retrospective amendments to Australian tax law have been to close the exploitation of loopholes rather than broaden the tax base.
What is the risk of retrospective tax law?
Retrospective law that broadens the tax base is undesirable because it is contrary to the rule of law. From a commercial perspective, retrospective tax law can cause uncertainty in business as investors lack confidence in the return on their investment. Equally, a degree of sovereign risk emerges in relation to non-resident investors. Retrospective tax law could be open to challenge on a basis other than retrospectivity - for example, it could be challenged as unconstitutional.
In the case of transfer pricing, to the extent that the law is directed to a small number of taxpayers (eg large business segment taxpayers with pre-existing issues actively in dispute with the ATO), or a law that applies differently to taxpayers that have entered into arrangements with non-residents of a DTA country (as opposed to a non-DTA country), it could be viewed as arbitrary. Generally, the likelihood of an attempted challenge to the retrospective application of a tax law is likely to be relative to the extent to which a revenue authority seeks to impose the retrospective application of a law.