On 1 November 2011, Assistant Treasurer Bill Shorten issued a press release and associated consultation paper proposing changes to Australia's transfer pricing regime.  

The press release foreshadows retrospective legislation which:

  • would allow the Commissioner, with effect from 1 July 2004, to rely on Australia's bilateral tax treaties as an independent source of assessment power; and
  • seeks to apply the treaty rules in a manner that promotes consistency with the OECD Guidelines.

The Treasury consultation paper seeks comments on a number of proposals that the Government hopes will align Australia's transfer pricing regime more closely with the OECD's approach.  Submissions in response to the consultation paper are due on 30 November 2011.

Retrospective amendments to transfer pricing rules

Australia’s domestic transfer pricing rules are in Division 13 of the Income Tax Assessment Act 1936 (Cth).  The legislation is focused on the arm’s length consideration in respect of individual transactions. 

Australia’s bilateral tax treaties traditionally do no more than allocate taxing powers between jurisdictions.  They contain broad transfer pricing provisions which focus on expected profits rather than individual transactions.

The ATO recently lost a significant transfer pricing case, C of T v SNF (Australia) Pty Ltd [2011] FCAFC 74.  In that case, the Full Federal Court confirmed that profit based transfer pricing methodologies, particularly the transactional net margin method, are not consistent with the words of Division 13.

The proposed retrospective legislation would change the transfer pricing methodologies applicable in Australia by amending the domestic legislation that gives effect to Australia's bilateral tax treaties, rather than through substantive changes to Division 13.

Mallesons is involved in most of the key transfer pricing audits that are currently pending resolution with the ATO.  Taxpayers who are the subject of these audits may now be exposed to treaty based transfer pricing adjustments, even though they may be able to demonstrate that they complied with Division 13.

The 1 November press release does not address how penalties and interest will be applied to taxpayers who complied with Division 13, but may now be subject to retrospective transfer pricing adjustments under the broader provisions of a treaty.

Consultation on prospective amendments to the transfer pricing rules

In addition to the proposed retrospective legislation, the Treasury consultation paper proposes substantial amendments to Division 13.  Amendments under consideration include:

  • a shift away from pricing individual transactions, with a greater focus on adjusting profits based on economic activity attributable to Australia;
  • greater reliance on OECD guidance in interpreting Australia’s transfer pricing rules, which would place a greater emphasis on profit based transfer pricing methods;
  • moving to a self assessment system and introducing time limits for transfer pricing adjustments; and
  • adopting the OECD’s functionally separate entity approach for attributing branch profits.

It is unclear whether Australia will follow the UK approach of “future proofing” its transfer pricing rules and to what extent departures will be allowed from the OECD guidance.