Changes to the transfer pricing rules and Part IVA anti-avoidance regimes in the Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Bill 2013 have just been passed by the Senate.
What will you need to watch out for with the transfer pricing changes?
A key concern with the transfer pricing changes is the breadth of the Commissioner of Taxation's reconstruction power.
This new power allows the Commissioner to have regard to the economic substance of a transaction, and potentially construct a hypothetical transaction. As part of this, he can assert that parties may not have entered into a particular transaction had they acted as independent parties dealing at arm's length with each other. The taxpayer must then disprove this. In addition, without proper documentation, as defined by the Act, the taxpayer will not be able to reasonably argue its position.
Unresolved questions with the Part IVA changes
As we pointed out in February, there are significant unresolved questions about how the Part IVA changes will operate.
It is not clear when it is appropriate to apply the "would have" limb rather than the "might reasonably be expected" limb.
The Bill's explanatory material indicates that the "would have" limb might generally apply where the particular scheme has no other commercial or economic consequences other than tax (in practice, this might mean particularly aggressive schemes which result in deductions being available for no economic loss). It also indicates that the "might reasonably be expected" limb will apply where there were real commercial or economic consequences arising from the scheme so the relevant events need to be "reconstructed" to reveal the tax that was avoided.
Unfortunately, these concepts do not appear in the Bill itself and thus the application of these limbs will only become clear in practice.
When do the transfer pricing and Part IVA changes come into effect?
The transfer pricing changes will apply to income years commencing on or after the earlier of 1 July 2013 and the day the Bill receives Royal Assent (which should be very soon). In respect of withholding tax, the rules will apply in relation to income derived, or taken to be derived, in income years commencing on or after the earlier of the above two dates.
The Part IVA changes will apply to schemes that commenced to be carried out on or after 16 November 2012 (the day the exposure draft was released).