When it rains it pours!
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When it rains it pours!

Frank Putrino, a partner at KPMG Australia, and Damian Preshaw, a KPMG consultant, look at developments in transfer pricing since 2012 and examine Australia’s plans for further changes.

For a country as dry as Australia is, it is often the case that when it rains it pours! The same might be said of transfer pricing in Australia recently. Notwithstanding the introduction of retrospective interim transfer pricing rules in 2012 and new transfer pricing rules in 2013 and the passing of legislation in 2014 to require the ATO to release income tax information for corporates with total income of AUD100 million or more, further significant legislative changes were made at the end of 2015 that included:

  • The introduction of a new Multinational Anti-Avoidance Law (MAAL) based on the first limb of the United Kingdom's recently introduced Diverted Profits Tax (DPT) to counter tax structures that are perceived to avoid the existence of a permanent establishment in Australia;

  • The introduction of CbCR together with the associated Master File and Local File; and

  • A doubling of penalties associated with transfer pricing adjustments for significant global entities (annual global revenue for the MNE is A$1 billion or more) in the absence of a Reasonably Arguable Position (RAP).

If the above developments weren't enough, the government recently proposed further changes to Australia's transfer pricing environment and to the ATO's administration thereof in the May 2016 Budget including:

  • The proposed introduction of a new DPT based on the second limb of the United Kingdom's DPT;

  • Adopting the OECD's new Transfer Pricing Guidelines;

  • Significant increases in the maximum penalties that can be imposed on large MNEs;

  • The establishment of a new Tax Avoidance Taskforce in the ATO with funding being provided for an additional 390 specialised officers; and

  • New tax conditions imposed on foreign investment into Australia.

But wait, there's more! Throughout 2015 and continuing in 2016 there has been ongoing focus by the media in relation to the tax paid by MNEs in Australia or more accurately the perception that MNEs do not pay their fair share of tax in Australia. This focus has been fed at least in part by the Senate Economics References Committee's Inquiry into Corporate Tax Avoidance, and more recently by the leaking of the Panama Papers.

In October 2015, the Federal Court of Australia handed down its decision in the Chevron case which, amongst other things, is leading to a reconsideration of traditional transfer pricing approaches with respect to such fundamental transfer pricing issues as comparability.

And while all of the above has been taking place, the ATO continues to actively enforce compliance with Australia's transfer pricing rules.

A number of the above measures and proposals are covered in more detail below.

Australia's reaction to the OECD/G20 BEPS project

Australia has been an enthusiastic supporter of the OECD/G20 BEPS project from the outset. It has also been an early adopter of a number of the recommendations arising out of the OECD's October 2015 final BEPS report. However, Australia is also taking unilateral action to address BEPS.

Introduction of CbCR, Master File and Local File

Australia is one of the first countries to introduce CbCR together with the associated Master File and Local File. Legislation was passed in December 2015 with the new reporting requirements to apply to large MNEs for income years commencing on or after January 1 2016. The first documents to be filed are due by December 31 2017.

In Australia, it is important to note that the obligation to file the CbC report, the Master File and the Local File is placed directly on an Australian member of the MNE rather than on the ultimate parent/reporting entity for the MNE (although it is anticipated that ordinarily the ATO would receive the CbC report from the tax jurisdiction in which the ultimate parent/reporting entity for the MNE is located). Further, this obligation is additional to existing record keeping requirements in Australia's tax laws and to the transfer pricing recordkeeping rules in Subdivision 284-E of Schedule 1 to the Taxation Administration Act 1953.

To ensure compliance with the new reporting requirements, the May 2016 Budget announced a one hundred-fold increase in the maximum penalty from A$4,500 to A$450,000 for non-lodgement of tax documents with the ATO.

CbC report and Master File

The ATO has indicated that the approved form for the CbC report and for the Master File will follow Annex III and Annex I, respectively, of the OECD guidance on Action 13.

Local File

After a period of consultation, the ATO has recently finalised its requirements for the Local File and is now developing instructions to accompany the Local File which are planned for release mid-2016.

In Australia, the Local File is more focused on collecting entity and related party transaction data in an electronic form from which the ATO can run data analytics to identify potential transfer pricing risks. By contrast, the Local File in Annex II of the OECD guidance on Action 13 is more akin to traditional transfer pricing documentation.

In Australia, there will be two tiers of Local File: a 'Short Form Local File' for taxpayers with sufficiently small and/or low-risk International Related Party Dealings (IRPDs) – that will require only qualitative information regarding the local entity to be provided; and a 'Local File' for all other impacted taxpayers – that will require very granular information on IRPDs to be provided (Part A); and copies of written agreements, foreign APAs and rulings for 'material' IRPDs to be provided (Part B).

Large MNEs will need to pay specific attention to the unique Australian Local File requirements when implementing their global CbCR strategy.

Adoption of new OECD TP Guidelines

As part of the May 2016 Budget, the government announced that the transfer pricing laws would be amended to give effect to the OECD's new Transfer Pricing Guidelines (arising out of Actions 8-10 of the OECD's October 2015 final BEPS report). The amendment will apply from July 1 2016.

Unilateral action to address BEPS

Notwithstanding its enthusiastic support for the OECD/G20 BEPS project, Australia is nevertheless taking unilateral action that goes further than the recommendations in the OECD's October 2015 final BEPS report. The two key examples of this are the introduction of the MAAL at the end of 2015 and the May 2016 Budget announcement that Australia would introduce a DPT.


The MAAL is designed to counter tax structures that are perceived to avoid the existence of a permanent establishment in Australia and therefore Australia having a taxing right over some part of the profits of the non-resident entity selling into Australia. The MAAL is an anti-avoidance measure and therefore is not subject to Australia's tax treaties. It applies from January 1 2016 irrespective of when arrangements within its scope were entered into. Further, where the MAAL applies, the base penalty amount is 100% in the absence of a RAP.

When the proposed MAAL was originally announced as part of the 2015 May Budget, it was portrayed by the government as being targeted at a small group of MNEs primarily operating in the information and technology sector. However, the ATO recently stated that 170 MNEs have either been approached by the ATO or have approached the ATO with a view to ascertaining whether the MAAL applies to them.

Recently, the ATO has expressed concern that some MNEs are entering into artificial and contrived arrangements to avoid the application of the MAAL: Taxpayer Alert TA 2016/2 (Interim arrangements to avoid MAAL).

Diverted Profits Tax

Given all the recent legislative changes in Australia, the government's May 2016 Budget announcement that a DPT would be introduced with effect for income years from July 1 2017 came as a surprise. The DPT is modelled on the second limb of the United Kingdom's DPT and is broadly targeted at arrangements with 'insufficient economic substance' between an Australian entity and an overseas related party that are taxed at a rate less than 80% of the applicable Australian tax rate. A new penalty tax of 40% will apply to the diverted profits with the tax payable upfront (interest will also apply). No grandfathering of existing arrangements is proposed.

Essentially, the objective of the DPT is to change the balance of negotiating power between the ATO and MNEs on transfer pricing and structuring issues. The May 2016 budget estimated additional revenue from the DPT to be A$100 million per year from 2018-19.

The government has issued a discussion paper in relation to the proposed DPT and has invited comments.

New Tax Avoidance Taskforce to be established in the ATO

A further announcement in the 2016 May Budget was the establishment of a new Tax Avoidance Taskforce within the ATO specifically targeting MNEs, large public and private groups operating in Australia as well as high wealth individuals. While the new taskforce brings together a number of existing compliance areas within the ATO, the ATO will get additional funding to employ an extra 390 personnel in the taskforce. The taskforce is expected to raise A$3.7 billion in tax liabilities over four years and is to be overseen by the Tax Commissioner and assisted by a panel of eminent former Judges.

Litigation – The Chevron case

On October 23 2015, the Federal Court of Australia (FCA) handed down its decision in Chevron Australia Holdings Pty Ltd (CAHPL) v Commissioner of Taxation No.4 [2015] FCA 1092. The case concerns the transfer pricing implications of an intercompany loan between CAHPL and its United States subsidiary Chevron Texaco Funding Corporation (CFC) and whether the interest paid by CAHPL to CFC exceeded an arm's length price for the borrowing. The Court found for the Commissioner.

The case turned on the inability of CAHPL to satisfy the evidentiary burden imposed on it that the amended assessments were excessive (ie that the consideration paid was the arm's length consideration or less than the arm's length consideration).

While the decision related to Australia's previous transfer pricing rules, the decision has implications far beyond transfer pricing for intercompany loans:

  • Onus of proof: In litigation, the ability of a taxpayer to discharge the onus of proof that amended assessments are excessive is critical.

  • Comparability: Comparability is king! CAHPL could not show that the comparable uncontrolled transactions it used to support its position included similar terms and conditions to those of the intercompany loan in question and were therefore rejected by the Court.

  • Implicit support: While implicit support is a relevant matter to take into account, the credit rating of the borrower is dependent on the facts and circumstances of the case. In this case, implicit support was found to have little impact on the standalone credit rating of CAHPL.

Chevron has appealed the decision and the appeal has been set down for a hearing at the end of August 2016.

ATO compliance activity continues

The ATO continues to be active in enforcing compliance with Australia's transfer pricing rules. In addition to the ATO's focus in recent years on marketing hubs and inbound intercompany loans, the ATO has also recently issued Taxpayer Alerts in relation to arrangements involving offshore procurement hubs (TA 2015/5), leasing arrangements (TA 2016/4) and hedging arrangements involving loans and cross-currency interest-rate swaps (TA 2016/3).

In the context of ATO risk reviews and audits, recent information requests sent to taxpayers by the ATO are showing an increasing focus on questions relating to understanding where risks associated with particular activities are being managed, and how. The ATO is also seeking copies of contracts of employment for key Australian-based personnel and is using them as a sense check to corroborate responses received to questions relating to the management of risks.

The ATO has issued a number of new and revised practice statements on the following:

  • Escalation process where reconstruction provisions to apply – PS LA 2015/3;

  • Advance pricing arrangements (APAs) – PS LA 2015/4; and

  • The interaction between customs and transfer pricing – PS LA 2016/1.

Greater tax transparency

In parallel with changes to recent transfer pricing rules has come the introduction of new rules requiring greater transparency with respect to the tax paid by MNEs in Australia.

Release of the first Corporate Tax Transparency report

In December 2015, the ATO released the first round of the Corporate Tax Transparency report for the 2013-14 income year for corporates with total income of A$100 million or more. The report contained information on 1,539 Australian public and foreign owned companies, noting the Australia Business Number (ABN), total income, taxable income and tax payable.

Large MNEs required to prepare general purpose financial statements (GPFS)

From July 1 2016, large MNEs that do not presently do so will be required to prepare GPFS, rather than special purpose financial statements, and to provide these to the ATO by the due date for lodgement of the income tax. The ATO in turn, must give a copy of the GPFS to the Australian Securities and Investments Commission (ASIC).

New tax conditions for foreign investments into Australia

The increased focus on transfer pricing and multinational tax avoidance more generally is having spill over impacts in other areas. For example, in May 2016, the Foreign Investment Review Board (FIRB) released new tax conditions that can be imposed on foreign investors wanting to invest in Australia, where it is considered that a particular foreign investment application presents a risk to Australia's income tax revenue.

The standard tax conditions include requiring foreign investors to:

  • Comply with Australia's taxation laws in relation to the proposed investment;

  • Comply with information requests from the ATO in relation to proposed investments; and

  • Provide an annual report to FIRB on compliance with the conditions by the due date for lodgement of the income tax return.

Additional conditions may also be imposed on a case-by-case basis where a significant tax risk is identified. Such conditions could involve a requirement that the investor enter into negotiations for an APA with the ATO or seek a private ruling from the ATO. A failure to meet any of the conditions may result in prosecution, fines and/or the Treasurer ultimately ordering a divestment of Australian assets.



Frank Putrino


KPMG Australia

147 Collins Street

Melbourne, Australia, 3000

Tel +61-3 9838 4269


Frank is the National Lead Partner in KPMG's Global Transfer Pricing Services ("GTPS") practice and has over 26 years of transfer pricing and international tax experience in both industry and professional service firms.

Prior to joining the GTPS practice, Frank was the Director & Counsel – Global Transfer Pricing for a Fortune 50 U.S. MNC for nine-and-a-half years where he was responsible for the design, development and implementation of transfer pricing strategy, policy, processes and documentation for the global operations of that MNC as well as Transfer Pricing Controversy (Audit Defence, Mutual Agreement Procedures & Advanced Pricing Agreements) across the Americas, Europe and Asia Pacific regions.

Prior to that, Frank was a Principal in a Professional Services Transfer Pricing team for 12.5 years and provided Transfer Pricing Planning, Compliance, Controversy and unilateral, bilateral and multilateral Advanced Pricing Agreements services to Australian outbound and inbound MNCs.

Frank has assisted a number of Australian and overseas based clients with their transfer pricing and global supply chain planning, compliance and controversy needs.

During his career, Frank has worked on a broad range of projects, and brings with him a wealth of operational and tax experience that can be applied across industries and jurisdictions. His experiences allow Frank to balance and recognise the synergies required among the business operations and tax teams, resulting in practical, commercial strategies that partner with viable transfer pricing solutions to complex business challenges.



Damian Preshaw

Director, Damian Preshaw Consulting Pty Ltd

KPMG Australia

c/-147 Collins Street

Melbourne, Australia, 3000

Tel: +61-423 780 219


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 ATO's Division 815 Technical Working Group.

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