The release of the alert coincides with the current economic downturn that has increased the likelihood of commercial losses of multinational enterprises. Given the relative strength of the Australian financial market, multinationals may be tempted to shift their business losses to the country. This would result in falling tax revenues.
“The recent release is in effect the ATO 'firing a warning shot' to taxpayers that particular care needs to be given to related party transactions that result in or contribute to losses in Australia,” said Nick Houseman, a tax partner at PricewaterhouseCoopers in Australia.
The ATO is determined to make sure that the arm’s length principle is followed when taxpayers are involved in transfer pricing arrangements, especially those concerning the movement of losses into Australia. The current market volatility makes it very difficult to determine the fair value of transactions for transfer pricing purposes.
To determine whether a transaction has been made at arm’s length, the ATO will scrutinise the arrangements on the basis of transfer pricing provisions, anti-avoidance rules and other tax provisions. If the ATO judges that a transgression has taken place, penalties and interest charges will be applied to the parties involved.
But there are cases where an Australian entity would be expected to participate in the losses of the multinational, for example, where a profit split transfer pricing method is being appropriately adopted.
“It is important that taxpayers prepare contemporaneous documentation to ensure they can demonstrate that the position they have taken in relation to their transfer prices is both appropriate in light of market conditions and is consistent with the arm's length standard,” said Houseman.
The ATO regards taxpayers that report losses as being a high risk of audit from a transfer pricing perspective.
“The best way in which taxpayers can mitigate this risk is through properly documenting their transfer pricing positions,” added Houseman.
