The Inspector General of Taxation has released his review into the Australian Taxation Of fic e’s (A T O) ma n agement of transfer pricing matters. He has made 18 integrated and detailed recommendations aimed at developing sufficient organisational capability to address transfer pricing risks, including giving priority to measures that target the highest risks to tax revenue. Of these, 17 were accepted by the ATO either in whole, in part, or in principle.
The review was prompted by a wide range of stakeholder concerns. The key underlying theme was insufficient ATO capability to deal with transfer pricing matters. The Inspector General noted this was compounded by developments arising from ongoing globalisation, international collaboration on base erosion and profit shifting (BEPS) emerging from the Organization for Economic Cooperation and Development (OECD) and G20 forums as well as changes to domestic transfer pricing legislation.
The report traces much of the ATO’s history in developing its transfer pricing governance approaches and processes. In looking to deal holistically with the issues, the recommendations range from broad principles of management to specific suggestions about compliance approaches. The recommendations are grouped under five headings.
ATO’s strategic management approach to transfer pricing issues
The ATO mostly agreed with recommendations which broadly encouraged the following principles:
- develop case teams with a special focus on international and transfer pricing issues
- match the scope and scale of transfer pricing compliance with the available resources and capability of its staff and improve planning
- improve the effectiveness of its risk assessment and targeting including giving priority to project based work, and
- rationalise complex ATO management arrangements and clarify the roles and responsibilities of specialist units and operational teams. A significant cause for concern was the complex interactions between the ATO’s internal functions and a lack of clarity with respect to the decision-making process.
However, a proposal for a body of transfer pricing specialists to oversee casework was rejected by ATO as being contrary to the fundamental principle of compliance officers being accountable for decisions.
ATO’s compliance approaches and processes
Several practical recommendations were agreed with in part by the ATO. These included:
- increased use of safe harbours
- simplified transfer pricing documentation requirements for taxpayers with lower value dealings
- publishing as much industry information as possible
- a review of the International Dealings Schedule to annual income tax returns, and
- ensuring specialist units engage with taxpayers and their advisers where requested and where appropriate.
For its part, the ATO acknowledged that its information gathering approaches are not always consistently applied by all case officers in all cases.
ATO’s Advance Pricing Arrangements (APA) and Mutual Agreement Procedures (MAP)
The promotion and use of the APA program is endorsed and the report includes a wide range of recommendations. Among them are suggestions that the ATO:
- identify the types of arrangements that will be accepted into the APA program
- set out the criteria that would lead the ATO to withdraw from APA negotiations
- require ATO officers, at the outset of APA negotiations, to make taxpayers aware of the ATO’s independent internal review process and the circumstances in which it can be initiated by the taxpayer
- explore options for reducing the timeframes for bilateral negotiations, such as mutual case planning, streamlined processes and early neutral evaluations in appropriate circumstances. This extends to a proposal to allow ATO officers to make critical assumptions of facts in APAs in a broader range of circumstances where taxpayers provide written assurances that the relevant facts are correct and that they bear the risk arising from any material inaccuracies, and
- re-introduce the public reporting of the information on its APA program and implement similar reporting for MAPs.
The ATO has rejected recommendations to:
- implement a 'stage and gate' process in relation to the analysis and negotiation of APAs, such that closed stages may only be reopened where material new information becomes available to the ATO
- consider an appropriate administration fee for complex bilateral APAs, and
- better resource the Competent Authority function and draw in expertise to enable it to appropriately test the evidence supporting the position of operational case teams with respect to bilateral APAs and MAPs.
Individual ATO officer capability
The report has identified the need for changes affecting information capture and dissemination, recruitment, career pathways and training.
ATO advice and guidance
While accepting a recommendation to update and consolidate its transfer pricing advice and guidance, the ATO has rejected a recommendation to retain the Transfer Pricing Working Group for five years as not being consistent with its streamlined approach to consultation.
Many of these recommendations contain multiple suggestions and proposals which will require a significant review of ATO practices to be fully implemented. The Inspector General has noted that as a consequence of the ATO’s disagreement with certain recommendations or aspects thereof, the full benefit of the intended integrated outcome may not be realised. As a result he remains concerned.
It will now be interesting to see how the ATO implements the recommendations with which it agrees and the extent to which it seeks to co-design and consult on any new management arrangements.
In response to one APA recommendation, the ATO advised that it will consider the matter as part of the broader review of the APA program and associated practice statement. The nature and extent of that review has not been announced by the ATO.