Internationally, Australia has been seeking to take a lead on addressing transfer pricing issues as chair of G20, with a focus on a global and coordinated approach to base erosion and profit shifting (BEPS).
Domestically, the focus has been on reform of the transfer pricing regime in light of deficiencies in the pre-existing regime (Division 13 of the Income Tax Assessment Act 1936) which were highlighted in a number of court/tribunal decisions.
The new regime in Subdivision 815-B of the Income Tax Assessment Act 1997 applies for tax years commencing on or after 29 June 2013. In broad terms, it seeks to align Australia’s domestic transfer pricing regime with international practice and includes a requirement to interpret the rules so as to best achieve consistency with the OECD’s transfer pricing guidelines.
Key elements of the new regime include that:
- it operates on a self-assessment basis;
- penalties are now explicitly linked to the existence of appropriate and contemporaneous documentation;
- the Commissioner has extensive powers to reconstruct a transaction to conform to arm’s length conditions; and
- there is a 7 year limitation period for the Commissioner to amend an assessment.
Under section 815-130, the arm’s length conditions are normally based on the form and substance of the actual commercial and financial relations between the Australian taxpayer and the foreign party. However, if:
- the form differs from the substance, then the form is disregarded;
- independent parties dealing at arm’s length in comparable circumstances would have entered other commercial and financial relations, then those other relations apply;
- independent parties dealing at arm’s length in comparable circumstances would not have entered commercial and financial relations, then the arm’s length conditions are based on the absence of those relations.
The Commissioner has issued a ruling on the power of reconstruction (TR 2014/6) which suggests that he interprets the power broadly and not necessarily limited by reference to the exceptional circumstances currently identified by the OECD in paragraphs 1.64 and 1.65 of the transfer pricing guidelines (noting that the OECD has proposed changes to the commentary on this issue as part of action plan on BEPS).
In recent times, the Australian media has focused heavily on issues associated with transfer pricing, particularly following the release of a report by the Tax Justice Network on the use of tax havens by ASX200 companies. There has also been reporting of a significant case in relation to the pricing of debt lent to Chevron Australia by a Delaware subsidiary, which was recently heard by the Federal Court of Australia.