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  • Monitoring and compliance stage

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    Annual Compliance Report

    As part of the APA terms, you will be required to prepare and provide us with an Annual Compliance Report (ACR) for each year of the APA. The ACR is separate from any requirement you have to lodge your income tax return.

    Your ACR should include:

    • an analysis of your compliance with the APA including the information and calculations demonstrating the outcome of the application of arm’s length methodology
    • details of any compensating adjustments made and how each was effected in the income tax return
    • whether there has been a breach of any critical assumptions.

    The ACR is to contain sufficient information to detail your actual results for the year and to demonstrate your compliance with the terms of the APA. We will tailor the specific requirements to be included in your ACR during the APA process.

    At the time of lodging your income tax return for an income year, or such other time specified, you send the ACR for the same income year to the Internationals Gatekeeper. In a bilateral APA, a similar reporting product may be required by the other tax treaty partner in respect of the other party to the APA. In some instances the ACR requirements of each jurisdiction may be specified in the bilateral agreement.

    We will review your ACR on the basis of your audited financial statements and may require you to provide further information to verify that you have complied with the terms of the APA. Your public officer should make the following declaration:

    I declare that I have examined the information contained in this APA Annual Compliance Report, including accompanying documents, and to the best of my knowledge and belief, the facts presented within this report and accompanying documents are true, comprehensive and accurate.

    Where we are satisfied that you have complied with the terms of the APA, we will provide you with written advice to this effect. You will only be contacted where it is necessary to clarify the contents of the ACR or to request further information. In the case of a bilateral APA, the tax treaty partner may also review their equivalent ACR. If they raise any issues, the Australian CA may then need to seek additional information from you.

    If you provide the information above you will be considered to have satisfied the requirements of subdivision 284-E of Schedule 1 to the Taxation Administration Act 1953.

    The terms of an APA will generally state that the APA may be revised, modified, suspended or cancelled if:

    • you fail to provide an ACR
    • you fail to provide additional information requested within a reasonable time
    • your records do not enable us to confirm readily that the transfer pricing methodology was applied as required by the terms of the APA and that critical assumptions were met.

    In this case, we would no longer be bound administratively by any undertaking not to conduct active compliance activity relating to the transfer pricing issues covered by the APA. If it is discovered that the ACR was false or misleading, the previous issue of an acknowledgment letter would not prevent us undertaking follow-up action. Some tax treaty partners retain the right to review or audit their corresponding taxpayer on APA covered dealings at any time.

    If we cancel your APA as a result of non-compliance with its terms, you will be considered to have satisfied the requirements of subdivision 284-E up to the point of cancellation of your APA.

    Record keeping

    You must retain all records relied upon in concluding the APA and all supporting data referred to in any ACR or used in applying the APA. The APA may specify the record retention period or specifically provide that certain records need not be retained.

    Unless otherwise stated in the APA, you are required to keep all records in respect of the covered dealings in accordance with the record keeping requirements under section 262A of the Income Tax Assessment Act 1936. You do not need to create or retain any records in addition to those mentioned above to satisfy the requirements of subdivision 284-E of Schedule 1 to the Taxation Administration Act 1953. You should make available any records needed for the purpose of monitoring the APA within a reasonable time upon request. If it is found that any of the critical assumptions and/or conditions have not been adhered to, or where the records do not enable us to readily confirm that such assumptions and conditions have been met, we will consider cancelling the APA for the remaining term.

    In the event you apply for an APA but negotiations subsequently breakdown and no APA eventuates, the documentation provided in support of your application through the early engagement and APA application stage may be taken into account when determining whether you have met the requirements of subdivision 284-E.

    Breach of critical assumptions

    If there is a breach of a critical assumption, as part of our relationship of mutual trust and consistent with the co-operative nature of the APA, you should tell us immediately. We will enter into discussions with you to clarify why the breach occurred and, if needed, all parties (including the tax treaty partner in a bilateral APA) will enter into discussions to revise, modify, suspend or cancel the APA. Any supporting documentation and any proposed course of action you may suggest (for example, revision of the APA) should be lodged as early as possible.

    When looking at a change in circumstances, including general or economic downturn, we would assess whether arm's length parties could reasonably have been expected to foresee or anticipate that change in circumstances at the time the APA was entered into. If so, we would consider whether the agreed transfer pricing methodology sufficiently took this into account. We would apply the arm's length principle to determine whether any change in critical assumptions is such that arm's length parties would have renegotiated the arrangement due to the change in circumstances.

    If the APA is revised or modified, the effective date of the revised or modified APA will be stated in the new APA. The revised or modified APA should also note the date on which the original APA became no longer effective.

    If a revised or modified APA cannot be negotiated, the APA will be cancelled. Unless otherwise agreed, the APA will be cancelled as from the date the critical assumption was breached. If a transactional profit method is the primary methodology that has been used in the APA, the APA will generally be cancelled with effect from the beginning of the income year in which the critical assumption was breached. In such circumstances the methodology generally applies to the dealings that occurred throughout the whole of the income year.

    Compensating adjustments

    Australia's domestic tax laws will determine the treatment to be afforded to any compensating adjustments or payments for the purpose of calculating taxable income for Australian tax purposes. Generally, you will be requested to suggest an appropriate mechanism that suits the circumstances of your business. The treatment and its tax effect will be discussed and agreed upon during the APA process.

    For example, assume you incur a further liability under the agreed APA, after the close of the income year, because your actual results exceeded the top of an agreed range or result. Generally, that further liability will only be allowed as a deduction in the year in which it is incurred despite the fact that the adjustment may relate to international related party dealings undertaken in the previous year. However, that deduction would be allowable for the previous year if the liability under the agreed APA had been incurred prior to the close of that income year and the subsequent adjustment was merely a calculation exercise.

    Collateral issues

    A collateral issue is an administrative or tax issue in relation to your affairs in addition to the cross border dealings that are the subject of the APA.

    When applying for an APA you need to identify any collateral issues that may impact on the operation of the APA, or that we may need to consider when deciding whether it is appropriate to proceed with an APA, for example, the possible applicability or otherwise of anti-avoidance rules. Where you or the APA team identify a collateral issue(s) you will need to provide an analysis of the application of the law to that issue(s).

    Collateral issues may need to be considered in conjunction with your APA request. Where possible, collateral issues will be addressed and resolved in parallel with the development of the APA. You may need to work with us to ensure that any collateral issues are appropriately resolved within an agreed timeframe.

    You will need to discuss with the APA team at the preliminary discussion step how collateral issues should be addressed. Options for addressing collateral issues may include:

    • applying for a private binding ruling, or other interpretive assistance product
    • consideration of the issue by tax technical personnel within the ATO
    • having a risk assessment product applied to the issue
    • obtaining counsel opinion on the issue.

    Anti-avoidance provisions as a collateral issue

    Consistent with the treatment of other collateral issues, we will consider the possible application of Part IVA of the Income Tax Assessment Act 1936 or other specific anti-avoidance provisions that may arise in relation to the cross-border dealings to be covered by the proposed APA in conjunction with your APA request. Where you request a private binding ruling in respect of these matters, the APA team leader will work with you to coordinate the ruling request.

    Where it is found that Part IVA or another specific anti-avoidance provision may arise in relation to the cross border dealings to be covered by an APA, we will consider the transfer pricing issues arising as part of the APA request or application and those anti-avoidance matters concurrently. If Part IVA or specific anti-avoidance provisions may apply to transactions other than those to be covered by the proposed APA these issues will also be resolved in parallel with the progression of the proposed APA.

    Rollback

    The APA team leader will consider whether transfer pricing issues in years prior to your proposed APA need to be resolved prior to or as part of the APA. Resolving transfer pricing issues in years prior to those covered by the APA is a collateral issue. One method that may be available to resolve such an issue is to apply the transfer pricing methodology developed for the APA to those prior years of income. This is called rollback. Rollback will be appropriate where there are no material changes to the covered dealings or the conditions that operate between the parties in the rollback period as compared to the APA period. See Section 24 of PS LA 2015/4 Advance Pricing Arrangements for further information.

    Where there is a need to amend a prior year return as a result of addressing a transfer pricing issue in that year, the amendment will be treated as though you had made a voluntary disclosure, provided active compliance has not already been commenced, or we have not previously made contact with you or your representative(s) with respect to the prior year returns. Where active compliance has not commenced, additional penalty taxes, if any, will be calculated on the basis of you having made a voluntary disclosure in relation to each prior year. Where active compliance has commenced, the normal penalty provisions apply to any adjustments made to the years under review.

    Renewals

    If you wish to renew your APA, you should seek renewal at least six months before the expiration of the existing APA to allow time for negotiation and conclusion. Generally, the renewal of an APA will follow the same procedure as the original APA request. In certain circumstances, however, it would be expected that the time taken to complete the renewal of an APA would be significantly less than an original APA.

    For timeframes to be reduced you would have to provide any relevant information requested and demonstrate that:

    • you complied with the terms of the existing APA
    • the covered dealings are consistent with those in the existing APA
    • there are no material changes to functions, assets or risks for the taxpayer or other parties to the covered dealings
    • the transfer pricing methodology used in the previous APA remains the most appropriate
    • the critical assumptions in the existing APA are still appropriate.

    We may require new or updated economic studies and supporting documentation. This decision will be made at the early engagement stage.

    Where a renewal involves substantial changes to the terms used in the existing APA then the renewal process will probably have a similar timeframe to an original APA process.

    If you have complied with the terms of the existing APA but have not demonstrated your commitment to fostering constructive working relationships and mutual trust with us, for example if your profitability was consistently at the bottom of an agreed range throughout the APA period, this will be taken into consideration when we make the decision whether to progress a renewal request.

      Last modified: 16 Jul 2019QC 43088