Taxpayers doing business in Australia or with Australia through associated entities should take note of the new Transfer Pricing Legislation that was introduced to Parliament. The effective date of the new legislation is 01 June 2013 or the date on which the legislation receives royal ascent whichever is the earlier. In light of the new legislation it is advised that transactions between related parties are carefully reviewed. The review should focus on correct documentation of the arm’s length standard. Particular attention should be given to intra-group financing arrangements as this is a complex area that interacts with the thin capitalisation regime. In essence there is the requirement to establish the arm’s length price of debt.
The main points covered by the proposed legislation are as follows:
Arm’s Length Principle
- Whilst it is a well-accepted principle that transactions between associated persons must be at arm’s length, taxpayers will be required to assess that this in fact is the case in relation to their Australian operations. Basically related party transactions must be carried out on same/ similar terms as if the transactions were carried out between independent parties.
- The new legislation gives power to the Commissioner to disregard and reconstruct transactions. The reconstructive powers are available in “exceptional circumstances”. Exceptional circumstances will exist where the transaction would not be entered into between unrelated parties and where a difference exists between the substance and the form of the transactions. The term” exceptional circumstances” is broad enough to allow the Commissioner flexibility in interpretation. Given the current climate and government’s drive to collect revenue, one can be almost certain that this power will readily be used by ATO.
- Whilst there is no requirement to keep transfer pricing documentation in line with the new regulations, taxpayers who do not keep adequate transfer pricing documentation, will not be able to argue that they have adopted an acceptable and reasonable position. This will result in tax shortfalls and harsher penalties being imposed by the ATO. At a practical level, often the level of documentation required is not complex or hard to put together so if you don’t have documentation it is recommended that you contact us so we can advise you as to the minimums required to at least try and protect your position.
- New legislation proposes a shorter time limit of 7 years of assessment during which a transfer pricing adjustment can be made. This is a welcomed approach as the current transfer pricing legislation does not prescribe a time limit.
In summary, it is recommended that all intra-group transactions and policies be reviewed, carefully documented and carried out on arm’s length basis. If you wish to discuss and/or assess any potential exposures your business may be facing or require any further information on this topic, please do not hesitate to contact us.