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TP 2012: The Good The Bad The Ugly
The Government introduced a new domestic TP provision, Subdivision 815-A of the Income Tax Assessment Act 1997, which gives the Commissioner of Taxation the power to make TP adjustments under Australia's tax treaties. This will align Australia's TP regime with international practice by requiring the rules to be interpreted consistently with OECD guidance.
It is proposed that the go forward TP legislation be self-assessed. That is, rather than requiring the Commissioner to make a determination, taxpayers must determine if the actual conditions of their cross-border dealings reflect arm's length conditions or, if not, what adjustments ought to be made. coupled with that change, is the inclusion of annual documentation requirements. While these are not mandatory, taxpayers that don't have documentation to support their calculations of taxable income or losses under arm's length conditions will be denied the ability to argue they have a "reasonably arguable position".
The proposed rules provide that in identifying the arm's length conditions, regard must be had to the "economic substance" of what was actually done, and the "legal form" of what was done does not limit the identification of the arm's length conditions. The draft explanatory memorandum states it is possible to substitute actual dealings or arrangements if "independent entities would not have done what was actually done given the options that are realistically available to them". Due to the fact this is against OECD guidelines, it is rather concerning.
While there are some changes that are welcome, by and large, the new transfer pricing landscape will be a headache for many taxpayers. It is worrying that the government would suggest amendments which are against, or do not follow, OECD guidelines. Multinationals should keep an eye these transfer pricing developments as they may affect any opeartions held in Australia.