Tax Laws Amendment (Cross-Border Transfer Pricing) Act No. 1 (2012) 'Sub-Division 815-A' - Frequently asked questions
The Tax Laws Amendment (Cross-Border Transfer Pricing) Act No. 1 (2012), referred to below as the Act, which inserted Subdivision 815-A into the Income Tax Assessment Act 1997 received royal assent on 8 September 2012.
The Act confirms that the internationally consistent transfer pricing rules contained in Australia's tax treaties and incorporated into Australia's domestic law provide assessment authority to enable the Commissioner of Taxation to make treaty-related transfer pricing adjustments. The Act also provides direct access to relevant guidance material published by the Organisation for Economic Co-operation and Development (OECD).
Subdivision 815-A applies to income years commencing on or after 1 July 2004.
Subdivision 815-A only applies in tax treaty cases to which an associated enterprises or business profits article applies so there will be no impact on cases involving non-treaty jurisdictions. Pending any subsequent legislative changes to Australia's transfer pricing rules, Division 13 remains the only provision under which transfer pricing adjustments can be made in these non-treaty cases.
The rules in the new subdivision are consistent with those in Australia's tax treaties. Standard practice (pre-dating the implementation of subdivision 815-A) is that Australian Taxation Office (ATO) transfer pricing audit teams consider the application of the relevant transfer pricing article(s) of Australia's tax treaties to the arrangements under audit. Since Subdivision 815-A uses the relevant terms and text of those treaties, the application of the Subdivision will necessarily follow the requirements of the application of the relevant treaty article, including the same reasoning and analysis.
Administratively, subdivision 815-A will be applied in all current and ongoing tax treaty cases.
No. Where a taxpayer has properly entered into a settlement with the Commissioner on a transfer pricing matter, the settlement deed will normally prevent the Commissioner from imposing a less favourable outcome on the taxpayer. In any case, given the ATO's existing views on the treaty power, settled cases have been closed on that basis.
Subdivision 815-A only operates on the basis of the Commissioner making a determination to negate a transfer pricing benefit. The principles underlying the new Subdivision are entirely consistent with the ATO's previous approach to transfer pricing, so APAs, whether bilateral or unilateral, that have been agreed to will not be re-opened or otherwise affected by the new law.
Similarly, APAs currently under negotiation will not be impacted.
Additionally, MAP cases agreed between the ATO and another revenue authority will not be reopened. As noted above, we see the approach required by Subdivision 815-A as entirely consistent with our longstanding approach to transfer pricing cases, including cases which have been through MAP. Nothing in the new Subdivision disturbs the operation of our treaties, including settlements reached through the MAP process.
No. Subdivision 815-A operates exclusively by way of the Commissioner's determination - it is not self-executing. Additionally, the principles underpinning the new Subdivision are entirely consistent with Australia's transfer pricing rules, so the enactment of 815-A should not result in any material change in the way in which the ATO will view, and assess, transfer pricing matters.
Taxpayers can continue to rely on the advice contained in the ATO's transfer pricing rulings in relation to prior income years, and into the future, until such time these rulings are amended or withdrawn.
Consistent with public statements of senior ATO officials, there are no plans to change our compliance program on the basis of Subdivision 815-A. We will maintain our current transfer pricing risk assessment and compliance activities, and will continue our efforts to address tax risks in as they emerge. In summary, the ATO's transfer pricing program and compliance focus is 'business as usual' as a result of the legislative change.
Despite the above, taxpayers who have concerns that their tax outcomes associated with their related party international dealings do not meet the arm's length standard as required by Subdivision 815-A, or by Division 13 or the relevant treaty article(s), are encouraged to come forward and discuss those concerns with the ATO.
The new Subdivision contains no explicit requirement to create or maintain documentation in addition to the existing requirements in the income tax law. However, such documentation should have regard to the guidance set out in section 815-20, to the extent the guidance is relevant.
The ATO has long recommended that taxpayers keep appropriate documentation to support their material related party international dealings. Such records make it easier for you to demonstrate that you have a reasonably arguable position for the purposes of administrative penalties. Additionally, in accordance with Taxation Ruling TR 98/11, having adequate and high-quality contemporaneous documentation which meets the requirements set out in the taxation ruling should mean that you will generally not be subject to administrative penalties in the event of a transfer pricing adjustment.
For income years commencing prior to 1 July 2012, any adjustments made under 815-A can only be subject to scheme penalties1 to the extent that the adjustment could have been made under other provisions of the income tax law in existence prior to the enactment of Subdivision 815-A (see section 815-10 of the Income Tax (Transitional Provisions) Act 1997). This will ensure that an entity will only be liable to administrative penalties in relation to a scheme benefit which could have been negated under another provision of the income tax law had Subdivision 815-A not been enacted.
For income years commencing on or after 1 July 2012, Subdivision 284-C scheme penalties can apply to adjustments made under Subdivision 815-A.
Subdivision 815-A only applies in treaty cases and is wholly consistent with treaty approaches. The Subdivision also does not affect a taxpayer's ability to access the MAP under the treaty, which places an obligation on the competent authority in the ATO to endeavour to relieve double taxation.
While it is true that some of our treaty partners apply a statute of limitations to MAP adjustments, broadly, s170(9B) of the Income Tax Assessment Act 1936 allows an assessment to be amended at any time to give effect to Division 13 determinations, and adjustments made under the relevant treaty transfer pricing articles. This has been the case since Division 13 was enacted in 1982. As a result, despite the fact that the new Subdivision may be applied to income years commencing from 1 July 2004, a taxpayer's ability to access MAP, and the likelihood of a successful MAP, is unchanged by the introduction of the Subdivision.
Additionally, since Subdivision 815-A requires a transfer pricing benefit to be worked out by reference to the terms and text of a particular associated enterprises or business profits article, each transfer pricing benefit can only relate to a single jurisdiction. As the Explanatory Memorandum to the Act explains, this means that if an entity gets transfer pricing benefits in relation to more than one jurisdiction, the ATO must negate each transfer pricing benefit separately. This means a taxpayer will be able to apply to the correct competent authorities for relief should double taxation occur (see paragraph 1.122 of the Explanatory Memorandum which accompanied the Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012 (the EM)).
No. Again, it is important to note that the approach required by Subdivision 815-A is wholly consistent with the ATO's existing approach to applying Australia's transfer pricing rules in relevant cases.
The words referenced in the Subdivision are clear - they refer to "profits which would have accrued to an Australian entity … but, by reason of non-arm's length conditions … have not so accrued" (s.815-5(a)). Further, the Subdivision expressly requires that the determination of any transfer pricing benefit is done consistently with relevant OECD guidance. Such guidance makes clear that:
"There is no justification under the arm's length principle for imposing additional tax on enterprises that are less successful than average, or, conversely, for under-taxing enterprises that are more successful than average, when the reason for their success or lack thereof is attributable to commercial factors." (OECD 2010 Transfer Pricing Guidelines at paragraph 2.7)
The guidelines also note that while an associated enterprise which consistently returns losses may trigger further scrutiny of its transfer pricing, it is quite clear that "associated enterprises, like independent enterprises, can sustain genuine losses… [for] legitimate business reasons" (paragraph 1.70 of the 2010 Guidelines). Once again, this is entirely consistent with the ATO's existing guidance, contained in Taxation Ruling TR 97/20 (see the section from paragraph 2.99)
No. Subdivision 815-A relies for its terms and text on the relevant transfer pricing articles of our treaties, which the ATO has long maintained can be used to raise a transfer pricing adjustment applying the arm's length principle. In that sense, we do not see Subdivision 815-A as providing the Commissioner with any new or different powers in practical effect.
Importantly, the Subdivision requires the Commissioner to work out if an entity has received a transfer pricing benefit in a manner consistent with the relevant OECD guidance. This guidance material sets out the exceptional circumstances in which the non-recognition and alternative characterisation of arrangements or transactions is permitted. They are:
- where the substance of an arrangement differs from its form, or
- where the arrangement, viewed in its totality, differs from that which would have been agreed to by independent enterprises behaving in a commercially rational manner, and the structure of the arrangement practically impedes the determination of an appropriate transfer price for the dealings concerned.
Unless one of these preconditions is satisfied, such non-recognition and alternative characterisation of arrangements or transactions would not usually be permitted.
That said, the clear language of the relevant treaty articles, and the OECD guidance material which supports those articles, contemplate a range of situations in which arriving at an arm's length outcome requires something more than simply determining an arm's length price for a transaction seen in isolation. This may mean that while the structure of a controlled arrangement is respected, the arm's length outcome must be determined having regard to the totality of the commercial or financial relations between the parties.
Subdivision 815-A can apply to foreign entities with a permanent establishment (PE) in Australia. In line with the government's statements about the purpose of these amendments, the ATO's approach to attributing profits to PEs will not change as a result of the enactment of the Subdivision.
Subdivision 815-A relies on the business profits articles of Australia's tax treaties, so the terms of the relevant treaty article must be considered. Taxation Ruling TR 2001/11 Income Tax: international transfer pricing - operation of Australia's permanent establishment attribution rules provides guidance on the ATO's approach to attributing profits to PEs under the business profits articles of Australia's tax treaties, and is also relevant for the purposes of determining the effect of Subdivision 815-A.
The EM confirms the application of a single-entity approach. Paragraph 1.86 states, 'In determining the amount of the transfer pricing benefit, regard should also be had to any limitations under the general principles of the law in Australia as to how dealings between different parts of the same entity should be treated...'. This is consistent with the ATO's approach prior to the enactment of Subdivision 815-A - any specific provisions of the Income Tax Assessment Acts that may be relevant (such as Part IIIB of the ITAA 1936) must also be taken into account.
No. As has been noted above, for the purposes of Subdivision 815-A and consistent with the income tax law, the ATO will continue to adopt a single-entity approach to attributing profits to PEs. This is in line with the terms of our current business profits articles and the limitations under the general principles of the law.
Paragraph 1.98 of the EM notes that the OECD guidance material in respect of a treaty article will not be relevant to determining the effect of the Subdivision where the text of the applicable article deviates in substance from the corresponding OECD Model. Such a difference can be seen when comparing Australia's business profits articles and the 2010 OECD Model Article 7. This means that the 2010 OECD Commentary on Article 7, which endorses a functionally separate entity approach as the Authorised OECD Approach, will not be relevant for the purpose of determining the effect of Subdivision 815-A.
However, to the extent that it does not conflict with the text of the particular business profits article in question, the previous OECD Commentary to Article 7 may be relevant. Additionally, the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations may also provide relevant guidance in terms of applying the arm's length principle by analogy to the attribution of profits to a PE - this includes, for example, on conducting a functional and factual analysis.
Treasury noted in their 1 November 2011 Consultation Paper, 'Income tax: cross-border profit allocation - Review of transfer pricing rules', that any changes to the way in which profits are attributed to PEs would be progressed on a different timeline to the transfer pricing reforms. Since then, the government has commissioned the Board of Taxation to investigate the impacts of Australia adopting the Authorised OECD Approach. The Board is due to report to the Assistant Treasurer by 30 April 2013.
1 i.e. under Subdivision 284-C of Schedule 1 to the Taxation Administration Act 1953