The past year has seen a continuation of new legislation, a
ramping up of ATO compliance activity and a significant ATO win
in the courts in relation to transfer pricing.
For example, in April 2017, we saw the somewhat unusual
event of the treasurer and assistant treasurer issuing a joint
media release highlighting the ATO's transfer pricing
compliance activities:
- 71 audits currently underway in the large
business area covering 59 multinational enterprises (MNEs);
and
- At least seven major multinational audits
expected to come to a head before June 30 (four in e-commerce
and three in energy & resources) with expected
liabilities to total in excess of A$2 billion ($1.5
billion).
Then in late May, the ATO indicated that it expected to
issue A$4 billion of tax liabilities in 2017 against MNEs of
which about A$3 billion is directly related to transfer pricing
matters with e-commerce cases accounting for about A$1 billion,
related party financing accounting for about A$1.5 billion and
marketing hubs accounting for about A$500 million.
Also in April, the Full Federal Court delivered the
Commissioner of Taxation a significant win by upholding the
Federal Court's October 2015 decision against Chevron Australia
in one of Australia's largest tax cases.
And while the above has been happening, the past 12 months
have also seen further significant legislative developments
relevant to transfer pricing, particularly if you are a
Significant Global Entity (SGE) (broadly where the global group
has annual global income of A$1 billion or more) with the:
- Introduction of the diverted profits tax
– to apply from July 1 2017;
- Adoption of 2015 OECD BEPS Actions 8-10
– to apply to years of income commencing on or after
July 1 2016; and
- A significant increase in penalties for
SGEs – to apply from July 1 2017.
This country update discusses the above matters in more
detail.
Key legislative developments
Introduction of the diverted profits tax (DPT)
The most significant legislative development relevant to
transfer pricing over the past year has been the introduction
of the DPT. In February 2017, the prime minister of Australia
described the DPT as "one of the most advanced and some
would say draconian measures of its kind, in the world"
for the purpose of stamping out corporate tax avoidance.
Australia's DPT is similar to the second limb of the UK's
DPT.
In summary, the DPT is intended to provide the ATO with
additional powers, within Australia's general anti-avoidance
regime framework, to deal with global groups who have
'diverted' profits from Australia to offshore associates, using
arrangements that have a 'principal purpose' of avoiding
Australian income or withholding tax. The DPT will apply to
SGEs carrying on business in Australia.
Where the DPT applies, tax is imposed on the amount of the
diverted profit at a rate of 40% (Australia's corporate income
tax rate is 30%). Any DPT imposed is payable within 21 days of
the DPT assessment. The taxpayer has a 12 month review period
in which to provide the commissioner with further information
disclosing reasons why the DPT assessment should be reduced (in
part or in full). If, at the end of that period of review, the
relevant taxpayer is still dissatisfied, the taxpayer will have
60 days to challenge the assessment by filing an appeal with
the Federal Court. However, and significantly, the taxpayer
will generally be restricted to adducing evidence that was
provided to the commissioner before the end of the period of
review in any Federal Court proceedings.
Managed investment trusts, collective investment vehicles,
sovereign wealth funds, complying superannuation funds and
foreign pension funds are generally exempted from the
application of the DPT.
Limited exceptions
Importantly, the DPT will not apply where it is reasonable
to conclude that one of the following exceptions apply:
- Exception 1: The A$25 million
turnover test – where the turnover of the
taxpayer and other Australian entities in the same global
group does not exceed A$25 million for the year (provided no
income is artificially booked offshore).
- Exception 2:
Sufficient foreign tax test – where
the increase in the foreign tax liability is equal to or
exceeds 80% of the corresponding reduction in Australian
tax.
- Exception 3: Sufficient economic
substance test – where the profit made as a
result of the scheme by each entity connected with the scheme
reasonably reflects the economic substance of the entity's
activities in connection with the scheme.
In practice, exception 3 will likely be a key area of focus
for MNEs and will require applying an Australian transfer
pricing lens to the functions, assets and risks of the
activities carried out in Australia, as well as to each entity
outside of Australia that is connected with the scheme, to
demonstrate that the profit made by each entity as a result of
the scheme reasonably reflects the economic substance of the
entity's activities in connection with the scheme.
Taxpayers most at risk
Taxpayers likely to be most at risk of the ATO seeking to
apply the DPT include taxpayers currently involved in a
transfer pricing dispute with the ATO where large cross-border
loans or a marketing hub is involved, taxpayers who have
undertaken business restructures, taxpayers with arrangements
covered by taxpayer alerts (e.g. cross-border leasing) and
taxpayers who have migrated intellectual property from
Australia.
Adoption of 2015 OECD BEPS Actions 8-10 report
Under Australia's transfer pricing rules, arm's length
conditions (relevant to cross-border dealings between separate
legal entities) and arm's length profits (relevant to
cross-border dealings within a single legal entity) are
required to be identified so as best to achieve consistency
with certain guidance material. Until the recent amendment, the
relevant guidance material included the OECD Transfer
Pricing Guidelines for Multinational Enterprises and Tax
Administrations, as approved by the Council of the OECD
and last amended on July 22 2010 (2010 OECD Guidelines). The
effect of the amendment is that the 2015 OECD BEPS Actions 8-10
report will also be relevant guidance material for purposes of
Australia's transfer pricing rules for years of income
commencing on or after July 1 2016.
Increased administrative penalties for SGEs
Notwithstanding the doubling of penalties associated with
transfer pricing adjustments for
SGEs in the absence of a 'reasonably arguable position'
(RAP) in late 2015, administrative penalties for SGEs have now
been significantly increased in relation to 'failure to lodge
on time' penalties and penalties relating to statements and
failing to give documents to the ATO, with effect from July 1
2017.
'Failure to lodge on time' (FTL) penalties
From July 1 2017, FTL administrative penalties for SGEs will
be as high as A$525,000 for covered documents lodged 16 weeks
or later. FTL penalties can apply where there is a failure to
lodge an income tax return, notice, statement or other approved
form with the ATO by the due date. For SGE's, FTL penalties
will also apply to CbC reports and general purpose financial
statements not lodged in the approved form by the due date.
Penalties relating to statements and failing to give
documents to the ATO
In addition to the increase in FTL penalties, the base
penalty amounts for SGEs in respect of penalties relating to
making false or misleading statements or failing to give
documents to the ATO ('culpable behaviour' penalties) have been
doubled. 'Culpable behaviour' penalties are of general
application and not specific to transfer pricing cases.
By way of example, the following base penalty amounts will
apply to SGEs from July 1 2017 where a false or misleading
statement results in a shortfall amount:
Intentional
disregard: |
150% of the
shortfall amount (previously 75%) |
Recklessness: |
100% of the shortfall
amount (previously 50%) |
No reasonable care: |
50% of the shortfall
amount (previously 25%) |
No RAP: |
50% of the shortfall
amount (previously 25%) |
CbCR, Master File and Local File
As SGEs turn their corporate mind to the practicalities of
preparing the CbC report, Australian local file (ALF) and
master file, the ATO has continued to assist by providing
guidance on its website. In particular, the ATO issued the
combined XML schema for the local file and master file and also
the detailed design for the local file and master file (which
built upon the local file – high level design document
issued in June 2016) in April 2017.
Common questions asked by taxpayers as they navigate through
the new processes are shown in Table 1.
Table 1 |
Question |
Answer |
When are the CbC report,
master file and ALF due? |
CbC reports are due 12
months after the end of the CbCR period. For December 31
year ends, the first filings are due by December 31
2017. |
How do I file the
various reports? |
The master file and ALF
must be lodged directly with the ATO in the approved XML
schema format.
The primary obligation to lodge the CbC report is on the
Australian taxpayer, but can be satisfied by the parent
entity lodging the report with its home jurisdiction and
then sharing with the ATO. |
Do I have to notify the
ATO who is lodging the CbC report? |
Yes, the notification
will be made in the ALF when that is lodged i.e. there is
no obligation in Australia to notify in advance. |
Are exemptions from the
CbC regime available and in what circumstances? |
Yes, an exemption may be
available in limited circumstances and must be applied
for. The two main grounds are:
• For Australian subsidiaries/branches, if the home
jurisdiction has not yet implemented CbCR, a transitional
one-year exemption from the CbC report and master file
may be available; and
• For Australian headquartered groups, that the
group does not have foreign operations. |
Does the ALF replace the
transfer pricing documentation rules in Australia? |
No, the ALF is separate
and in addition to the existing transfer pricing
documentation rules. The ALF is also very different to
the OECD Local File. |
Has the ATO provided any
administrative concessions to minimise the compliance
burden? |
Yes, taxpayers will not
have to prepare section A of the IDS if they lodge part A
of the ALF at the same time as they lodge their income
tax return. |
ATO has another win in its ongoing legal battle with
Chevron
On 21 April 2017, the Full Federal Court delivered the
commissioner of taxation another significant win in its ongoing
battle with Chevron Australia in relation to the transfer
prices it used on certain cross-border related party loans with
all three judges finding for the commissioner. The decision in
Chevron Australia Holdings Pty Ltd (CAHPL) v Commissioner
of Taxation [2017] FCAFC 62 addresses the question of
whether the interest paid by Chevron Australia on a loan from
its US subsidiary exceeded an arm's length price.
While the Full Federal Court's decision covered a wide range
of matters and addressed Australia's now superseded transfer
pricing rules in Division 13 and Subdivision 815-A, the
following key themes are worth noting:
- The independence hypothesis (underpinning
the statutory expression of the arm's length principle) is
not to be undertaken as if the Australian borrower was an
"orphan" (separate from, and independent of, its
multinational parent);
- The fundamental purpose of the reasonable
expectation hypothesis is to understand what the taxpayer, or
a person in the position of the taxpayer and in its
commercial context would have given by way of consideration
in an arm's length transaction; and
- If the evidence reveals (as it did here)
that the borrower is part of a group that has a policy to
borrow externally at the lowest cost and that it has a policy
that the parent will generally provide a third party
guarantee for a subsidiary that is borrowing externally,
there is no reason to ignore those essential facts in order
to assess the hypothetical consideration to be given.
The importance of having comprehensive, relevant commercial
and economic evidence to support transfer prices of related
party transactions was emphasised by the Federal Court at first
instance, and again highlighted in the Full Federal Court's
decision.
Chevron has recently lodged a special leave application to
the High Court.
ATO compliance activities
The ATO was given substantial additional funding last year
to establish and resource a new tax avoidance taskforce. This
taskforce has now been established and resourced with over
1,000 staff, with many coming from the private sector and
having transfer pricing experience.
As indicated in the introduction, the ATO is active in its
transfer pricing-related compliance activities and continues to
focus on marketing and procurement hubs, loans including
foreign currency loans coupled with cross-currency interest
rate swaps, intangible transfers, loss-making companies and the
potential application of the Multinational Anti-avoidance Law
(MAAL). More recently KPMG professionals have seen an increased
focus on the Australian pharmaceutical industry and also the
automotive sector in light of the impending closure of the
remaining automotive manufacturers operating in Australia.
Complementing its transfer pricing-related compliance
activities, the ATO has recently issued a number of practical
compliance guidelines (PCGs) that convey the ATO's assessment
of relative levels of tax compliance risk across a spectrum of
behaviours and arrangements:
- PCG 2017/1 – Sets out the ATO's
compliance approach to offshore related party procurement,
marketing, sales and distribution hubs. The PCG assigns hub
arrangements one of six different transfer pricing (TP) risk
categories or zones. Hubs outside the green zone are more
likely to be reviewed by the ATO.
- PCG 2017/2 – Updates previously
released guidance on Simplified Transfer Pricing Record
Keeping (STPRK) options that reduce the compliance burden for
certain taxpayers and/or international related party dealings
(IRPDs). To the extent taxpayers can apply the STPRK options,
the ATO will not dedicate compliance resources to qualifying
taxpayers/IRPDs.
- PCG 2017/D4 (Draft only)
– Sets out the ATO's proposed compliance approach
with respect to cross-border related party financing
arrangements. The draft PCG continues the ATO's colour
spectrum approach to assessing tax risk (adopted in PCG
2017/1) to funding arrangements and allocates scores to
various attributes of the funding arrangements. It is noted
that the scores allocated to the green low-risk rating are
largely features only ascribed to AAA-rated loans as opposed
to ratios reflecting a broader range of investment grade
funding.
Conclusion
The Australian transfer pricing landscape has become a more
difficult one for MNEs to safely navigate, particularly where
the Australian entity qualifies as an SGE. There are some
unique or exceptional features such as the MAAL, DPT and the
ALF which deviate in material ways from the OECD/G20's BEPS
project and therefore make Australia an outlier. Proceed with
caution!
Damian
Preshaw |
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KPMG Australia
c/- Tower Two, 727 Collins Street
Melbourne, Australia, 3008
Tel +61-423 780 219
dpreshaw1@kpmg.com.au
Damian is a consultant to KPMG and is a transfer
pricing specialist with more than 20 years' experience
in both the private sector and with the ATO. Prior to
establishing Damian Preshaw Consulting Pty Ltd in
October 2015, Damian was a director in KPMG's Transfer
Pricing Services group in Melbourne for 12 years. In
this capacity, Damian advised a wide variety of
multinational clients on transfer pricing and profit
attribution issues with a special focus on dispute
resolution, financial services, financial transactions
and business restructuring. Prior to joining KPMG,
Damian was an international tax counsel in the ATO's
Transfer Pricing Practice in Canberra and was an
Australian delegate to the OECD's Working Party No.6
(Taxation of Multinational Enterprises) from 1994 to
2003. Damian is a member of The Tax Institute's (TTI)
Large Business and International Committee and
represented TTI on the ATO's Division 815 Technical
Working Group.
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