The new transfer pricing rules include specific provisions that, in certain circumstances, require the taxpayer to disregard in whole, or in part, the actual transactions entered into and replace them with hypothetical transactions. The intention was for the rules to be consistent with the 'exceptional circumstances' under which the OECD Transfer Pricing Guidelines permit the non-recognition of transactions.
Although the intention may be that the reconstruction provisions should only apply in exceptional cases, the ATO's draft guidance is very broad and will require taxpayers to consider the potential application of these provisions to all dealings they enter into. While this approach may be deliberate so as to encompass a broad range of fact patterns and possibilities, it is far from definitive and is likely to cause undue concern and uncertainty among taxpayers and increase their compliance burden in light of the self-assessment based application of these provisions.
The new transfer pricing rules also introduced documentation requirements as a prerequisite for establishing a reasonably arguable position on a transfer pricing matter. This impacts the penalties that may apply in the event of an adjustment. To meet the new requirements, documentation must be prepared by the time of lodging the Australian income tax return and be in the possession of, or freely accessible to, the Australian taxpayer. The documentation must be consistent with the OECD Transfer Pricing Guidelines, while also addressing the particular requirements of the Australian transfer pricing law (such as the reconstruction provisions).
Taxpayers who have prepared documentation in prior years based on the ATO's previous guidance will need to review their approach as some modifications may be required to ensure the new legislative requirements are met.
Interestingly, the ATO's draft guidance suggests certain global business and industry information should be included in the Australian transfer pricing documentation. The OECD's current proposals for transfer pricing documentation would require this information to be compiled in a global master file rather than in local country files. Arguably, the ATO's expectations of the global information that should be included in the local Australian file go beyond what would be required for the OECD master file.
As the new rules operate on a self-assessment basis, all taxpayers must assess whether their related party dealings are arm's-length before lodging the tax return, even if they choose not to prepare formal transfer pricing documentation. Many taxpayers are likely to seek to perform at least a preliminary assessment before year-end to reduce the likelihood of needing to make a post-year end adjustment in the tax return which may give rise to double tax. Taxpayers with a June 30 year-end will be the first required to apply the new rules (to the year ending June 30 2014).
Tom Seymour (firstname.lastname@example.org)
Tel: +61 (7) 3257 8623
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