Changes to transfer pricing rules likely to affect global companies: HLB Mann Judd Sydney

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Changes to transfer pricing rules, which will be applied retrospectively, are intended to bring Australian practices in line with international rules but could mean significant changes for the Australian operations of international groups, warns Mr Neil Wickenden, tax partner at HLB Mann Judd Sydney.

Changes to transfer pricing rules, which will be applied retrospectively, are intended to bring Australian practices in line with international rules but could mean significant changes for the Australian operations of international groups, warns Mr Neil Wickenden, tax partner at HLB Mann Judd Sydney.

Mr Wickenden says that the changes being introduced by the government have been triggered by losses for the Australian Taxation Office in two recent transfer pricing tax cases.

“The changes are a reform of Australia’s transfer pricing rules and future Australian double tax agreements (DTAs) to bring them into line with international developments. They are particularly likely to affect Australian subsidiary companies or branches of multi-national groups.

“The reforms mean that the Taxation Office may be able to review any transfer pricing documentation in existence, not by reference to Australia’s transfer pricing rules, but by reference to the DTA Associated Enterprises articles; and it may do so for periods after 1 July 2004,” he said.

The Taxation Office has yet to indicate how it may administer this new assessing power.

“A Treasury consultation paper has been released that will lead eventually to revision of Australia’s transfer pricing rules, and means that existing Australian transfer pricing documentation will have to be reviewed by companies to ensure conformity with the new rules.

“If transfer pricing documentation is not consistent with the new rules, it may have to be amended or replaced with updated documentation.”

The changes have been brought about by two cases, Roche Products and SNF Australia.  The Administrative Appeals Tribunal decision in the case of Roche and the Full Federal Court decision on SNF Australia, illustrated the differences between Australia’s transfer pricing rules and those found in Australia’s DTAs based on the OECD model.

In these cases, the decisions went against the ATO’s contention that the treaty articles, between Australia and the countries in which the head offices of Roche and SNF Australia operated, empowered the ATO to raise assessments.

The Tribunal and the Courts decided that the treaties only allocated taxing rights between the countries.

A number of areas are suggested for change in the consultation paper. These include:

  • the introduction of an arm’s length standard reflecting international norms
  • interpretation of new rules in a manner most consistent with OECD guidelines
  • application of Australia’s new rules on a self-assessment basis.

“The consultation paper ultimately rejects Australia’s current transfer pricing rules, which are based on transaction pricing, and uses the ‘arm’s length principle’ as the basis of establishing a fair sharing of profits between related enterprises, as distinct from establishing appropriate transfer prices between them.

“Accordingly, it states that key elements of the changes will be inclusion of the arm’s length principle and application of the OECD guidelines in the new transfer pricing rules,” Mr Wickenden said.

Changes are expected to include introduction of the following rules:

  • Self-assessment of arm’s length outcomes by taxpayers, rather than reliance on the exercise of the Australian Taxation Office’s discretion as to whether the transfer pricing provisions apply.
  • Statutory time limits within which tax assessments can be amended for transfer pricing adjustments (consistent with the Australian income tax law generally), rather than permitting amendments at any time as at present.
  • A rule to determine when material circumstances of non-arm’s length cross border dealings are comparable to dealings between independent parties dealing at arm’s length, expressly referring to the OECD guidelines’ comparability factors.
  • Approved transfer pricing methods and the criteria for their selection, with the rule that the ‘most appropriate’ method, or combination of methods, for any particular situation would be applied.

HLB Mann Judd Sydney is a firm of accountants and business and financial advisers, and a member of the HLB Mann Judd Australasian Association.

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For more information please contact:

Neil Wickenden – Phone: 02 9020 4220

 

28 February 2012