Draft compliance guideline on cross-border related party financing
The Australian Tax Office (ATO) has released a draft practical compliance guideline (PCG 2017/D4) (the guideline) on its compliance approach on transfer pricing issues associated with related party cross border financing arrangements. This guideline, once finalised, will have effect from July 1 2017 and will apply to existing and newly created financing arrangements. This guideline is not intended to constitute technical advice or guidance. Rather, this guideline is a risk assessment framework tool that sets out how the ATO will assess compliance risk attaching to cross-border related party financing arrangements and invites companies to self-assess their compliance risk.
This guideline applies to any financing arrangements with non-Australian resident related parties. However, subject to certain exceptions, this guideline does not apply to a financing arrangement that is a form of Islamic finance or one that is entered into by a member of a wholly owned group that contains an authorised deposit-taking institution, an Australian resident securitisation vehicle, or an Australian resident taxpayer eligible to apply the simplified transfer pricing record keeping options.
The guideline allocates scores to various attributes of a financing arrangement including pricing, leverage of borrower, interest coverage ratio, collateral, subordination, currency and the headline tax rate of the lender entity jurisdiction. Once the scores are collated, the financing arrangement can be classified into one of the six risk "zones". Such classification is intended to assist taxpayers to assess the tax risk of the related party financing arrangement and to better understand the compliance approach the ATO is likely to adopt given the risk profile of that arrangement. For instance, the ATO will generally not examine the relevant tax outcomes of related party cross-border financing arrangements of taxpayers who fall within the low risk "green zone", other than to confirm facts and check eligibility for that rating.
This guideline was released after a landmark transfer pricing decision whereby the Full Federal Court dismissed Chevron Australia Holdings Pty Ltd's appeal related to the deductibility of interest on the Australian dollar equivalent of US$2.45 billion loans from its US subsidiary, Chevron Texaco Funding Corporation (CFC).
Tax Commissioner's address on challenges and future focus
In a public address on July 5 2017, the Australian Tax Commissioner Chris Jordan reflected on how the large businesses' tax landscape in Australia has changed significantly with the introduction of the Multinational Anti-Avoidance Law, the diverted profits tax, and the proposed BEPS anti-hybrid rules, along with better information sharing between international tax authorities.
Further, Jordan stated that he is satisfied that the ATO has the necessary resources to reduce the "large market corporate tax gap" and will focus more of its attention on small businesses, the black economy, phoenix operators, and the individuals' market.
ATO provides common reporting standard compliance relief
On June 26 2017, the ATO made a declaration pursuant to the Tax Laws Amendment (Implementation of the Common Reporting Standard) Act 2016 that 25 jurisdictions (including Bahamas, China, Hong Kong, Indonesia and UK) shall be "committed jurisdictions" for the purposes of implementing the common reporting standard (CRS) requirements. As a consequence of the declaration, Australian financial institutions are relieved from carrying out the required CRS due diligence procedures on accounts belonging to residents of the "committed jurisdictions". The CRS is operative from July 1 2017 and the declaration has effect from that date until December 31 2019.
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