Australia – Transfer pricing reconstruction not limited to “exceptional circumstances”
Australia – Transfer pricing reconstruction not limited to “exceptional circumstances”
November 12: The Australian Taxation Office (ATO) today finalised a transfer pricing ruling that sets forth the Commissioner’s position on application of the reconstruction provisions, as outlined in section 815-130 of the Income Tax Assessment Act 1997.
The ruling—TR 2014/6—covers situations when the Commissioner may re-price, reconstruct or disregard cross-border transactions, if such transactions are considered to be not at arm’s length and thus generate a transfer pricing benefit in Australia.
Increased compliance risk
Taxpayers need to be aware that there may be increased compliance risk and uncertainty in the following situations.
When arm’s length conditions and actual conditions differ, the reconstructions provisions will be applied automatically—without the need for the Commissioner’s discretion.
Taxpayers are subject to the reconstruction provisions for both situations when the actual conditions differ from the arm’s length conditions and when omissions to act represent departures from arm’s length behaviour.
Through the ruling, the ATO requires actual conditions to be “identical” to arm’s length conditions and has defined the concept of “substance” very broadly. This has the potential to substantially increase the number of situations when the reconstruction provisions will apply.
The reconstruction powers apply to transactions entered prior to the commencement of the provisions to the extent that a transfer pricing benefit arises in financial years commencing on or after 29 June 2013.
The ruling leaves it open for the Commissioner to challenge debt that has been priced in an arm’s length manner but when the taxpayer is not considered sufficiently profitable.
In line with current ATO activity, examples have been modified / supplemented to focus on marketing hubs, transfers of intangibles, and loss-making companies.
KPMG observation
By increasing risk and uncertainty, without providing adequate guidance on how to document defensible positions, tax professionals have observed that the ruling makes the Australian taxpayer’s task of compliance more difficult and expensive. To this point, the ATO has indicated that additional documentation guidance will be provided in further rulings scheduled for release in the near future.
