On June 19 2020, the Australian Taxation Office (ATO) released guidance on its approach to the potential impacts of COVID-19 on transfer pricing arrangements, to assist taxpayers in preparing their transfer pricing documentation. Some of the key points raised by the ATO included:
Emphasis will be placed on taxpayers gathering sufficient evidence to support any changes to, or impacts on, business as a result of COVID-19, including to the functions, assets or risks of any Australian entities.
The ATO acknowledges that an analysis of comparables may not reliably support arm’s-length outcomes, due to the impact of COVID-19, particularly in the short term. As such, the ATO may seek to understand the financial outcomes that would have been achieved by taxpayers ‘but for’ the impact on COVID-19.
At this time, there are no proposed changes to the profit markers in Practical Compliance Guideline PCG 2019/1 due to COVID-19. This PCG outlines the ATO’s approach to assess risk ratings for Australian inbound distributor arrangements, based on profit margins and functional profile.
The ATO also notes that existing and in progress APAs may be adversely impacted by COVID-19 and will seek to engage with taxpayers to resolve any issues.
In addition, the ATO issued a statement that it was aware of taxpayers seeking to review or restructure their related party arrangements in light of COVID-19. The ATO flagged that it will review such changes to related party arrangements where they are driven by tax advantages, such as avoiding withholding tax or reducing assessable income from overseas-related parties. In particular, the ATO states that it will review such arrangements from a transfer pricing perspective, to assess whether independent parties dealing wholly independently in comparable circumstances would have mutually agreed to such changes to the existing related party arrangements.
On July 15 2020, the ATO also released guidance on the treatment of JobKeeper payments in transfer pricing arrangements. The JobKeeper regime is an Australian government programme designed to assist Australian businesses affected by COVID-19 pandemic, principally by subsidising wages of their employees. The ATO states that it will seek to review arrangements where the JobKeeper payment has resulted in a change to the transfer price received by an Australian entity (for example, where it is taken into account in determining a cost-plus margin).
Australia adopts OECD 2017 transfer pricing guidelines
The Australian transfer pricing legislation has been formally amended to include the revised OECD 2017 Transfer Pricing Guidelines as guidance that may be used to determine the application of the Australian transfer pricing rules (previously these provisions referred to the 2010 Transfer Pricing Guidelines). These amendments have retrospective effect from July 1 2017.
These amendments bring Australia’s transfer pricing rules up to date with the latest OECD Transfer Pricing Guidelines and may potentially be further updated to include more recent OECD transfer pricing guidance, including those in respect of financial transactions.
New South Wales flags potential major tax reform
On July 1, the State Government of New South Wales (NSW), Australia’s most populous state, released a draft report of the review of Federal Financial Relations, which recommended major state tax reform. Some of the key potential measures recommended in the report included:
Replacing property stamp duty with a broad-based land tax;
Replacing all specific taxes on insurance policies with broad-based taxes;
A national unified approach to payroll tax; and
Agreeing on options for increasing the good and service tax (GST) rate and/or expanding the base of the GST.
The recommendations in the report were mainly driven by the economic impact of COVID-19 and also by a broader review of the financial relations and taxing rights of the Federal and State Governments of Australia, following 20 years from when GST was first introduced into Australia. While still in draft and open for public consultation, the report flags potential significant reforms to state taxation in Australia, which may be adopted within NSW and more broadly across Australia, especially in light of economic conditions.
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