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  • Changing related party agreements

    We have published COVID-19 economic impacts on transfer pricing arrangements. It outlines the evidence and analysis you should maintain to support your transfer pricing positions, including where you have applied (or are applying) for an Advance Pricing Arrangement.

    The economic effects of COVID-19 has placed pressure on businesses to review their operations, particularly around related party dealings. Whilst we know most large corporates do the right thing, we want provide certainty to assist you in making the right decisions.

    We are aware of communications suggesting tax advantages by changing related party arrangements in the COVID-19 environment. These include:

    • Triggering tax deductions for foreign exchange losses by early termination or repayment of liabilities under related party financing agreements.
    • Avoiding ongoing withholding obligations on amounts payable to overseas parties by changing related party agreements.
    • Reducing assessable income from rights or property provided to overseas related parties by changing related party agreements.
    • Increasing contractually assumed risks and allocation of global economic losses for limited risk entities by changing related party agreements.

    We will be reviewing changes of these kinds by examining documentation to assess whether:

    • Independent parties dealing wholly independently in comparable circumstances would have mutually agreed to change the existing related party agreements or arrangements.
    • Independent parties dealing wholly independently in comparable circumstances would have entered into the terms or conditions of the new related party agreements or arrangements. For example, if the new contracts or arrangements produced detriments or limited benefits for the taxpayer.
    • There is a mismatch between the substance of the actual dealings or relations, and changes made to related party agreements or arrangements.
    • A purpose of the changes to the agreements or arrangements was to obtain an Australian tax benefit or a diverted profits tax benefit relevant to considering application of Part IVA of the Income Tax Assessment Act 1936 or other anti-avoidance rules.
    • The changes to the related party agreements or arrangements and the commercial justification developed in anticipation of a potential review by us, originated with a tax adviser.

    Next steps:

    • We recommend you email us at International@ato.gov.au if you have entered into or are considering such changes to your related party agreements or arrangements due to COVID-19.
    • If you have a dedicated key relationship manager you contact them directly for help with your case.
    Last modified: 19 Jun 2020QC 62954