Australia's transfer pricing rules have not been significantly amended since their introduction in 1982. In the last 20 years, the Commissioner of Taxation has issued extensive public rulings in relation to the transfer pricing rules.  However, Court decisions, including most recently in Roche Products Pty Ltd v FCT [2008] AATA 639 and FCT v SNF (Australia) Pty Ltd [2011] FCAFC 74, have raised questions about a number of aspects of Australian transfer pricing practice.

On 16 March 2012 the Government released an Exposure Draft of proposed amendments to the transfer pricing rules.  As of 24 May 2012, the Government has introduced new legislation into Parliament, in the Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No.1) 2012 (Bill), which largely follows the Exposure Draft.

Broadly, the proposed changes are intended to be "for clarification" only.  This is said to justify the proposal for the rules to have retrospective application from 1 July 2004.  This raises the spectre of double taxation risk on positions previously settled in other countries. This has caused great controversy given the alternative view that it was not the law that needed clarification, rather its practice. 

Key features of the proposal

The Bill proposes to introduce a new subdivision 815-A into the Income Tax Assessment Act 1997 as a first phase of amendments to domestic transfer pricing rules.  The principal focus is on the interaction between Treaty rules and domestic rules.

Where a Tax Treaty applies, the Treaty will apply and operate independently of the domestic legislation, by incorporating the relevant Treaty Articles for Business Profits of a Permanent Establishment (PE), and Associated Enterprises, into domestic law.  The arm's length principle must be interpreted in a manner that is most consistent with applicable OECD guidance.

A new concept of a "transfer pricing benefit" is also proposed.  This applies where, as a result of a transaction between an Australian tax resident and a foreign related party, the amount of profit that might have been expected to accrue to the entity has not so accrued.  An equivalent test applies for an Australian PE of a foreign resident, under which the Australian PE is treated as a "distinct and separate" enterprise.  The amount of the difference in profit is the transfer pricing benefit.  The Commissioner of Taxation is empowered to make determinations so that the taxpayer's tax liability properly reflects the benefit received, for instance by increasing a taxpayer's taxable income or reducing a loss.

It also is intended that adjustments can be made to a taxpayer's arm's length cost of debt before the application of the domestic thin capitalization rules.

The focus on "profits" is, broadly, intended to re-align Australian practice with the OECD, re-confirm profit methods are acceptable, and presumably, ensure that a case like SNF would be decided differently in the future. However, it may be misguided to assume reliance on OECD principles would compel a different outcome in a case like SNF.  More broadly, the Bill's framework suggests the intention to apply a reconstruction power in a way that, in many cases, could mean second-guessing business outcomes in Australia.  

The SNF decision found that the OECD Transfer Pricing Guidelines had no legal status and were, at best, guidelines only.  The Bill therefore includes a proposed rule that allows reliance to be placed on the most recent versions of the OECD Model Tax Convention and the OECD Transfer Pricing Guidelines, as well as any other documents prescribed by regulation.

At the date of writing, the Bill has passed the lower house, been referred to a Senate Economics Legislation Committee, and the Committee has released its report.  Broadly, the report's conclusion is that the Committee recommends the Bill's passage in its current form through the Senate, with the exception of the Committee's Coalition Senators who recommend the bill not be passed in the Senate.


While better aligning Australian transfer pricing practice with that of the OECD makes sense, the manner in which it is proposed this will be achieved may only cause greater uncertainty.