On 8 September 2012, amendments to Australia’s transfer pricing laws were made that affect income years commencing on or after 1 July 2004. The amendments were made by including a new Subdivision 815-A in the Income Tax Assessment Act 1997.
Subdivision 815-A supplements Australia’s existing transfer pricing laws and concerns transactions between related parties resident in Australia and in other countries with whom Australia has a double taxation agreement (DTA).
Is Subdivision 815-A retrospective law?
The Australian government has argued that Subdivision 815-A merely clarifies the existing law, rather than introducing new powers of taxation, and therefore has no retrospective application.
When Subdivision 815-A was introduced to Parliament, its stated intention was to “clarify” that existing transfer pricing rules in Australia’s DTAs operate as an alternative taxing power to those under domestic income tax assessment rules.
The Australia Taxation Office (ATO) has long held, and has publicly expressed, its view that DTA transfer pricing rules provide an alternative basis for transfer pricing adjustments. However, this view was not always shared by commentators, advisers and taxpayers, and hence Subdivision 815-A has been argued to have retrospective effect. However, the position had not been tested before a court.
Support for the proposition that Subdivision 815-A does not have retrospective effect may be gathered from:
- Parliament expressing its view that DTAs operate as a source of independent taxing power in explanatory memoranda for a number of prior tax law amendments, as well in the explanatory memorandum for the law enacting Subdivision 815-A ;
- legal advice obtained by the ATO that a DTA provides taxation power due to it being incorporated into domestic law providing for the assessment of tax; and
- judicial comments in the SNF case (at first instance)1 that there is “some force” to the view that the legislative intention is that taxing power is conferred under DTAs (albeit the issue was not directly considered).
However, arguments to the contrary may be made as follows:
- DTAs have the purpose of avoiding double taxation between treaty countries, rather than conferring taxing power. Adopting a contrary view produces some analogous results – for example, residents of treaty countries, but not residents of tax havens, are affected, and no clear statement of interaction exists with other domestic tax provisions affecting non-residents (such as interest withholding tax); and
- judicial comments in the Undershaft case2 that support this view (albeit not in the context of transfer pricing) and similar non-binding comments in the Roche decision.3
Does Parliament have the power to make retrospective law?
Parliament clearly has power to make retrospective law in Australia.4 However, Parliament has expressed its intention that retrospective changes should not be made lightly and, generally, retrospective amendments to Australian tax law have been to close the exploitation of loopholes rather than broaden the tax base.
What is the risk of retrospective tax law?
Retrospective law that broadens the tax base is undesirable because it is contrary to the rule of law. That is, the law must be known, available, clear and certain; applied equally and not arbitrarily; and execution action must be authorised by law.
From a commercial perspective, retrospective tax law can cause uncertainty in business as investors lack confidence in the return on their investment. Equally, a degree of sovereign risk emerges in relation to non-resident investors.
From a legal perspective, Parliament clearly has the power to pass retrospective tax law, despite commercial consequence.However, retrospective tax law could be open to challenge on a basis other than retrospectivity – for example, it could be challenged as unconstitutional, as the Australian constitution prevents the federal government from the acquisition of property on other than just terms or from making an arbitrary exaction.
It is possible that a retrospective imposition of tax could be:
- an acquisition of property on other than just terms, to the extent that it impairs or extinguishes the pre-existing right of a taxpayer to order its affairs under existing law; or
- an arbitrary exaction, on the basis that the exaction is not supported by taxing power or does not apply equally to all taxpayers.
In the case of transfer pricing, to the extent that the law is (or is perceived to be) directed to a small number of taxpayers (eg large business segment taxpayers with pre-existing issues actively in dispute with the ATO), or a law that applies differently to taxpayers that have entered into arrangements with non-residents of a DTA country as opposed to a non-DTA country, it could be viewed as arbitrary.
The likelihood of an attempted challenge to the retrospective application of a tax law (whether on similar grounds to those above or other grounds) is likely to be relative to the extent to which a revenue authority seeks to impose the retrospective application of a law and, in particular, whether the new law is applied to past matters previously subject to audit or dispute.