Australia’s double tax agreements form part of the Australian taxation laws. These double tax agreements contain transfer pricing rules. However Australia also has specific domestic tax transfer pricing rules in relation to international agreements. While it might be thought to be unnecessary, nevertheless the Government has now introduced previously foreshadowed legislation to confirm that the transfer pricing rules contained in Australia’s double tax agreements apply under Australia’s taxation rules. These new measures have retrospective effect being deemed to apply from the income year commencing 1 July 2004.
Under these provisions the Commissioner is given the power to make a determination to negate a transfer pricing benefit that an entity receives. It is clear from the explanatory memorandum to the Bill that the Commissioner’s focus will now be on profits. A transfer pricing benefit will be where there is a difference between the profits that an entity would have made having regard to the arm’s length principle, and the amount of the profits it actually made. It is also clear that the arm’s length principle is to be interpreted as consistently as possible with relevant OECD guidance.
It appears that these new rules have been introduced, even though it is admitted in the explanatory memorandum that perhaps the amendments are unnecessary as they are probably already part of Australia’s income tax laws, because of the Commissioner’s defeat in the Full Federal Court decision in Commissioner of Taxation v SNF (Australia) Pty Ltd. The explanatory memorandum considers that this decision indicates that the domestic taxation rules on transfer pricing are not as robust as the provisions in the double tax agreements.